**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 
 **Washington,
        D.C. 20549**
 
 **FORM
        10-Q**
 
 **ý**
              
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                  OF 1934****FOR
                  THE QUARTERLY PERIOD ENDED DECEMBER 30, 2005****o**
              
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
                  ACT OF 1934**
 
  **Commission
        file number 000-04169**
 
 **SYS**
 (Exact
        name of Registrant as specified in its charter)
  **California**
              
              **95-2467354**(State
                  or other jurisdiction of
                incorporation
                  or organization)
              
              (I.R.S.
                  Employer
                Identification
                  No.)
 
  **5050
                  Murphy Canyon Road, Suite 200, San Diego, California
                  92123**
 **(858)
        715-5500**
 (Address,
        including zip code, and telephone number, including
 area
        code, of Registrant’s principal executive offices)
 
 Indicate
        by check mark whether the registrant: (1) has filed all reports required
        to be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the preceding 12 months (or for such shorter period that the registrant was
        required to file such reports), and (2) has been subject to such filing
        requirements for the past 90 days. Yes ý No o
  Indicate
        by check mark whether the Registrant is an accelerated filer (as defined
        in
        Exchange Act Rule 12b-2) Yes o No ý
  As
        of
        February 2, 2006 there were 12,670,845 shares of the registrant’s common stock
        outstanding.
  
 
  
  
 
 
 **SYS**
  **FORM
        10-Q**
  **FOR
        THE QUARTERLY PERIOD ENDED DECEMBER 30, 2005**
  **INDEX**
  **PART
                  I. FINANCIAL INFORMATION**Item
                  1.
              
              Financial
                  StatementsCondensedConsolidated
                  Balance
                  Sheets at June 30, 2005 and December 30, 2005
                  (unaudited)CondensedConsolidated
                  Statements
                  of Operations
                  for the Three and Six Months Ended December 30, 2005 and December 24,
                  2004 (unaudited)CondensedConsolidated
                  Statements of Cash Flows
                  for the Six Months Ended December  30, 2005 and December 24, 2004
                  (unaudited)Notes
                  to Condensed Consolidated Financial Statements (unaudited)Item
                  2.
              
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  OperationsItem
                  3.
              
              Quantitative
                  and Qualitative Disclosures About Market RiskItem
                  4.
              
              Controls
                  and Procedures**PART
                  II. OTHER INFORMATION**Item
                  1.
              
              Legal
                  ProceedingsItem
                  2.
              
              Unregistered
                  Sales of Equity Securities and Use of ProceedsItem
                  3.
              
              Defaults
                  Upon Senior SecuritiesItem
                  4.
              
              Submission
                  of Matters to a Vote of Security HoldersItem
                  5.
              
              Other
                  InformationItem
                  6.
              
              ExhibitsSignaturesExhibit
                  31.1Exhibit
                  31.2Exhibit
                  32.1Exhibit
                  32.2
 
 
 
 
 
 
 
 
 
 
 
 
  
  
 **PART
        I. FINANCIAL INFORMATION**
 **Item
        1. Financial Statements**
 SYS
                  AND SUBSIDIARIES
                CONDENSED
                  CONSOLIDATED BALANCE SHEETSDecember
                  30,
              
              
              June
                  30,2005
              
              
              2005(Unaudited)ASSETSCurrent
                  AssetsCash
              
              $
              414,000
              
              $
              3,485,000Accounts
                  receivable, net
              
              
              11,451,000
              
              
              10,992,000Inventory
              
              
              734,000
              
              
              97,000Prepaid
                  expenses
              
              
              325,000
              
              
              166,000Total
                  current assets
              
              
              12,924,000
              
              
              14,740,000Furniture,
                  equipment and leasehold improvements, net of accumulated depreciation
                  and
                  amortization of $1,668,000 and $1,428,000
              
              
              1,498,000
              
              
              1,169,000Capitalized
                  software, net of accumulated amortization of $68,000 and
                  $58,000
              
              
              34,000
              
              
              44,000Intangible
                  assets, net of accumulated amortization of $509,000 and
                  $315,000
              
              
              1,943,000
              
              
              1,188,000Goodwill
              
              
              13,300,000
              
              
              7,309,000Other
                  assets
              
              
              244,000
              
              
              305,000Total
                  assets
              
              $
              29,943,000
              
              $
              24,755,000LIABILITIES
                  AND STOCKHOLDERS’ EQUITYCurrent
                  Liabilities:Borrowings
                  under bank line of credit
              
              $
              572,000
              
              $
              --Accounts
                  payable
              
              
              929,000
              
              
              1,216,000Accrued
                  payroll and related expenses
              
              
              2,732,000
              
              
              2,954,000Income
                  taxes payable
              
              
              --
              
              
              138,000Other
                  accrued liabilities
              
              
              958,000
              
              
              1,058,000Current
                  portion of deferred tax liabilities
              
              
              562,000
              
              
              562,000Current
                  portion of convertible notes payable, related party
              
              
              --
              
              
              388,000Current
                  portion of convertible notes payable
              
              
              --
              
              
              319,000Note
                  payable - short term
              
              
              100,000
              
              
              --Deferred
                  revenue
              
              
              488,000
              
              
              54,000Total
                  current liabilities
              
              
              6,341,000
              
              
              6,689,000Convertible
                  notes payable, net of current portion, related party
              
              
              982,000
              
              
              973,000Convertible
                  notes payable, net of current portion
              
              
              1,257,000
              
              
              1,436,000Other
                  liabilities
              
              
              54,000
              
              
              4,000Deferred
                  tax liabilities
              
              
              249,000
              
              
              249,000Total
                  liabilities
              
              
              8,883,000
              
              
              9,351,000COMMITMENTS
                  AND CONTINGENCIESSTOCKHOLDERS’
                  EQUITY:4%
                  convertible preferred stock, $.50 par value; 250,000
                  sharesauthorized,
                  none issued or outstanding
              
              
              --
              
              
              --9%
                  preferred stock, $1.00 par value; 2,000,000 sharesauthorized,
                  none issued or outstanding
              
              
              --
              
              
              --Common
                  stock, no par value; 48,000,000 shares authorized;12,426,813
                  and 10,623,049 shares issued and outstandingas
                  of December 30, 2005 and June 30, 2005, respectively
              
              
              17,779,000
              
              
              12,792,000Retained
                  earnings
              
              
              3,281,000
              
              
              2,612,000Total
                  stockholders’ equity
              
              
              21,060,000
              
              
              15,404,000Total
                  liabilities and stockholders’ equity
              
              $
              29,943,000
              
              $
              24,755,000
 
 See
        accompanying notes to unaudited condensed consolidated financial
        statements.
 
  
  
 
 
 SYS
                  AND SUBSIDIARIES
                CONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONS
                (Unaudited)Three
                  Months Ended
              Six
                  Months EndedDecember
                  30,
              
              
              December
                  24,
              
              
              December
                  30,
              
              
              December
                  24,2005
              
              
              2004
              
              
              2005
              
              
              2004Revenues
              
              $
              12,448,000
              
              $
              10,462,000
              
              $
              25,542,000
              
              $
              21,569,000Operating
                  costs and expenses:Costs
                  of revenue
              
              
              9,330,000
              
              
              8,577,000
              
              
              19,492,000
              
              
              18,080,000Selling,
                  general and administrative
              
              
              2,072,000
              
              
              1,268,000
              
              
              3,793,000
              
              
              2,249,000Research
                  and development
              
              
              621,000
              
              
              51,000
              
              
              951,000
              
              
              60,000Total
                  operating costs and expenses
              
              
              12,023,000
              
              
              9,896,000
              
              
              24,236,000
              
              
              20,389,000Income
                  from operations
              
              
              425,000
              
              
              566,000
              
              
              1,306,000
              
              
              1,180,000Other
                  (income) expense:Other
                  income
              
              
              (22,000
              )
              
              --
              
              
              (58,000
              )
              
              --Interest
                  expense
              
              
              91,000
              
              
              122,000
              
              
              190,000
              
              
              236,000Total
                  other (income) expense
              
              
              69,000
              
              
              122,000
              
              
              132,000
              
              
              236,000Income
                  before income taxes
              
              
              356,000
              
              
              444,000
              
              
              1,174,000
              
              
              944,000Income
                  tax provision
              
              
              162,000
              
              
              188,000
              
              
              505,000
              
              
              384,000Net
                  income
              
              $
              194,000
              
              $
              256,000
              
              $
              669,000
              
              $
              560,000Net
                  income per share:Basic
              
              $
              0.02
              
              $
              0.03
              
              $
              0.06
              
              $
              0.07Diluted
              
              $
              0.01
              
              $
              0.03
              
              $
              0.05
              
              $
              0.06Weighted
                  average shares:Basic
              
              
              11,870,848
              
              
              8,159,177
              
              
              11,373,238
              
              
              8,156,426Diluted
              
              
              13,090,314
              
              
              10,884,093
              
              
              12,489,628
              
              
              10,923,211
 
 
 See
        accompanying notes to unaudited condensed consolidated financial
        statements.
 
 
 
  
  
 
  SYS
                  AND SUBSIDIARIES
                CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
                SIX
                  MONTHS ENDED DECEMBER 30, 2005 AND DECEMBER 24, 20042005
              
              
              2004Cash
                  Flows from Operating Activities:Net
                  income
              
              $
              669,000
              
              $
              560,000Adjustments
                  to reconcile net income to cash provided by(used
                  in) operating activities:Depreciation
                  and amortization
              
              
              459,000
              
              
              226,000Share-based
                  compensation expense
              
              
              266,000
              
              
              --Share-based
                  compensation expense - Polexis acquisition
              
              
              --
              
              
              67,000Straight-line
                  rent adjustment
              
              
              3,000
              
              
              41,000Accretion
                  of debt discount
              
              
              21,000
              
              
              23,000Gain
                  on disposition of equipment
              
              
              --
              
              
              (8,000
              )Stock
                  contributed to employee benefit plan
              
              
              394,000
              
              
              --Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (228,000
              )
              
              (3,709,000
              )Inventories
              
              
              (90,000
              )
              
              --Prepaid
                  expenses
              
              
              (66,000
              )
              
              126,000Accounts
                  payable
              
              
              (410,000
              )
              
              998,000Accrued
                  payroll and related taxes
              
              
              (469,000
              )
              
              (581,000
              )Income
                  taxes payable
              
              
              (138,000
              )
              
              242,000Other
                  accrued liabilities
              
              
              (252,000
              )
              
              (111,000
              )Deferred
                  revenue
              
              
              121,000
              
              
              17,000Net
                  cash provided by (used in) operating activities
              
              
              280,000
              
              
              (2,109,000
              )Cash
                  Flows from Investing Activities:Purchases
                  of furniture, equipment and leasehold improvements
              
              
              (392,000
              )
              
              (319,000
              )Cash
                  paid for acquisitions
              
              
              (4,560,000
              )
              
              (424,000
              )Proceeds
                  from investment
              
              
              90,000
              
              
              --Other
              
              
              (12,000
              )
              
              (13,000
              )Net
                  cash used in investing activities
              
              
              (4,874,000
              )
              
              (756,000
              )Cash
                  Flows from Financing Activities:Net
                  line of credit borrowings
              
              
              572,000
              
              
              829,000Payments
                  of notes payable and other borrowings
              
              
              --
              
              
              (69,000
              )Payments
                  on capital lease obligations
              
              
              --
              
              
              (16,000
              )Debt
                  issuance costs
              
              
              --
              
              
              (30,000
              )Withholdings
                  related to employee stock purchase plan
              
              
              223,000
              
              
              --Issuance
                  of stock to participants of employee stock purchase plan
              
              
              196,000
              
              
              59,000Proceeds
                  from exercise of stock options and warrants
              
              
              575,000
              
              
              --Registration
                  costs
              
              
              (43,000
              )
              
              (18,000
              )Net
                  cash provided by financing activities
              
              
              1,523,000
              
              
              755,000Net
                  decrease in cash
              
              
              (3,071,000
              )
              
              (2,110,000
              )Cash
                  at beginning of year
              
              
              3,485,000
              
              
              2,159,000Cash
                  at end of period
              
              $
              414,000
              
              $
              49,000
 
 See
        accompanying notes to unaudited condensed consolidated financial
        statements.
  
  
 SYS
                  AND SUBSIDIARIES
                CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
                SIX
                  MONTHS ENDED DECEMBER 30, 2005 AND DECEMBER 24, 20042005
              
              
              2004Supplemental
                  disclosure of cash flow information:Interest
                  paid
              
              $
              157,000
              
              $
              199,000Income
                  taxes paid
              
              $
              716,000
              
              $
              141,000Supplemental
                  disclosure of noncash investing and financing activities:Acquisitions:Fair
                  value of assets acquired
              
              $
              8,020,000
              
              $
              (14,000
              )Less
                  other liabilities
              
              
              (882,000
              )
              
              87,000Less
                  note payable issued
              
              
              (100,000
              )Less
                  value of warrants issued
              
              
              (64,000
              )
              
              --Less
                  common stock issued
              
              
              (2,414,000
              )
              
              --Cash
                  paid
              
              $
              4,560,000
              
              $
              73,000Common
                  stock issued on conversion of notes payable
              
              $
              898,000
              
              $
              --Common
                  stock exchanged upon exercise of stock options -
                  1,027 shares
              
              $
              5,000
              
              $
              --
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 See
        accompanying notes to unaudited condensed consolidated financial
        statements.
 
  
  SYS
        AND
        SUBSIDIARIES
 NOTES
        TO
        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  **1.
        Basis of Financial Statement Preparation and Significant Accounting
        Policies:**
 
 The
        accompanying condensed consolidated financial information of SYS and its
        subsidiaries (SYS or the Company) should be read in conjunction with the
        Notes
        to Consolidated Financial Statements contained in our Annual Report on
        Form 10-KSB to the Securities and Exchange Commission (SEC) for the year
        ended June 30, 2005. The accompanying financial information includes all
        subsidiaries on a consolidated basis and all normal recurring adjustments
        which
        are considered necessary by the Company's management for a fair presentation
        of
        the financial position, results of operations and cash flows for the periods
        presented. However, these results are not necessarily indicative of results
        for
        a full fiscal year. Additionally, certain prior period amounts have been
        reclassified to conform to the current period presentation. Substantially
        all of
        the Company’s operations are conducted in the United States.
 
 The
        Company’s fiscal year is from July 1 through June 30.  The
        Company uses the 5-4-4 weeks per period method for each quarter; periods
        one
        (July) and twelve (June) may vary slightly in the actual number of days due
        to
        the beginning and end of each fiscal year.
 
 **Use
        of Estimates:**
  The
        preparation of financial statements in conformity with Generally Accepted
        Accounting Principles in the United States (US GAAP) requires management
        to make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities, the disclosure of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of revenues and expenses
        during the reporting period. In the future, the Company may realize actual
        results that differ from the current reported estimates.  The Company’s
        significant estimates include those related to revenues and customer billings,
        recovery of indirect costs, allowance for doubtful accounts, valuation of
        long-lived assets including identifiable intangibles and goodwill, accounting
        for income taxes including the related valuation allowance, contingencies,
        and
        share-based compensation.
 
 **Development
        Costs of Software to be Sold**
 
 Costs
        related to research and development are generally charged to expense as
        incurred. Capitalization of material software development costs begins when
        a
        product’s technological feasibility has been established in accordance with the
        provisions of Statement of Financial Accounting Standards (SFAS) No. 86,
“Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
        Marketed.” To date, there is only a short time period between achieving
        technological feasibility, which the Company has defined as the establishment
        of
        a working model, which typically occurs when beta testing commences, and
        the
        general availability of such software. Consequently, software development
        costs
        qualifying for capitalization have been insignificant.
 
 **Revenue
        Recognition**
 
 The
        majority of the Company’s revenue is derived from contracts with agencies of the
        U.S. Government that are typically cost-plus-fee, time-and-material and
        fixed-price contracts. Revenue on these contracts results from work performed
        on
        these contracts by the Company’s employees and subcontractors and from
        pass-through of costs for material. Revenue on cost-plus-fee contracts is
        recorded as contract allowable costs are incurred and fees earned. Revenue
        for
        time-and-material contracts is recorded on the basis of contract allowable
        labor
        and subcontractor hours worked times the contract defined billing rates plus
        the
        cost of material used in the performance on the contract. Revenue from
        service-type fixed-price contracts is recognized ratably over the contract
        period or by other appropriate output methods to measure service provided,
        and
        contract costs are expensed as incurred. Under fixed-price contracts, other
        than
        service-type contracts, revenue is recognized under the percentage of completion
        method, on the basis of costs incurred in relation to estimated total costs
        to
        complete the contract. The risk to the company on a fixed-price contract
        is that
        if actual costs exceed the estimated costs to complete the contract, operating
        income is negatively impacted.
 
 Contract
        costs, including indirect costs, on certain U.S. Government contracts are
        subject to audit by the Defense Contract Audit Agency (the DCAA) before final
        billing and collection of receivables. Revenues have been recorded at amounts
        expected to be realized upon final settlement. Anticipated contract losses
        are
        recognized in the period in which they are identified.
 The
        Company also recognizes revenue from the sale of hardware, hardware products
        which include software that is more than incidental, hardware and software
        maintenance agreements, and Application Service Provider (ASP) services.
        The
        Company recognizes revenue when persuasive evidence of an arrangement exists,
        delivery has occurred or services have been provided, the sale price is fixed
        or
        determinable, and collectibility is probable.
 Revenue
          from product sales is generally recognized upon shipment, or once all applicable
          criteria have been met. Allowances are provided for estimated returns,
          discounts
          and trade-ins. Such allowances are adjusted periodically to reflect actual
          and
          anticipated experience.
 
 Revenue
          from maintenance and ASP services are recognized ratably over the maintenance
          term, which is typically one or two years. The unrecognized revenue portion
          of
          maintenance agreements billed is recorded as deferred revenue.
 
 Certain
          agreements include multiple deliverables or elements for products, software
          and/or services. Accordingly, the Company separates its deliverables into
          units
          of accounting in accordance with the provisions of Emerging Task Force
          (“EITF”)
          Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple
          Deliverables” using the residual method. In the absence of fair value for an
          undelivered element, the arrangement is accounted for as a single unit
          of
          accounting, resulting in a deferral of revenue recognition for the delivered
          elements until the undelivered elements are fulfilled.
 
 Revenue
          on software products and software-related elements are recognized, in accordance
          with SOP No. 97-2, “Software Revenue Recognition.” For arrangements that
          include both hardware products and software products, the Company evaluates
          the
          arrangement based on EITF 03-5, *“Applicability
          of AICPA Statement of Position 97-2 to Non-Software Deliverables in an
          Arrangement Containing More-Than-Incidental Software.”* In
          accordance with the provisions of EITF 03-5, the arrangement is divided
          between software-related elements and non-software deliverables.
          Software-related elements are accounted for in accordance with SOP 97-2.
          When
          software arrangements contain multiple elements and vendor specific objective
          evidence of fair value exists for all undelivered elements, the Company
          accounts
          for the delivered elements in accordance with the “Residual Method” prescribed
          by SOP No. 98-9. Otherwise, revenue is deferred and recognized in
          accordance with SOP 97-2.
 
 **New
        Accounting Standards:**
 
 In
        June
        2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”
(“SFAS 154”). SFAS 154 replaces Accounting Principles Board Opinion No. 20 (“APB
        20”) and SFAS No. 3, “Reporting Accounting Changes in Interim Financial
        Statements”, and applies to all voluntary changes in accounting principle, and
        changes the requirements for accounting for and reporting of a change in
        accounting principle. APB 20 previously required that most voluntary changes
        in
        accounting principle be recognized by including in net income of the period
        of
        change a cumulative effect of changing to the new accounting principle whereas
        SFAS 154 requires retrospective application to prior periods’ financial
        statements of a voluntary change in accounting principle, unless it is
        impracticable. SFAS 154 enhances the consistency of financial information
        between periods. The Company early adopted SFAS 154 in its first quarter
        of
        fiscal year 2006. The adoption of SFAS 154 did not have a material impact
        on the
        Company’s results of operations or financial position.
 
 In
        November 2004, the FASB issued SFAS No.
        151,
        "Inventory Costs" ("SFAS 151"), an amendment of ARB No. 43, Chapter 4. SFAS
        151
        clarifies the accounting for abnormal amounts of idle facility expense, freight,
        handling costs and wasted material. SFAS 151 is effective for inventory costs
        incurred during fiscal years beginning after June 15, 2005. The adoption
        of SFAS
        No. 151 did not have a material effect on the Company’s financial position,
        results of operations or cash flows.
 
 **2.
        Share-based Compensation:**
 
 The
        Company has stock plans that provide for the grant to employees of stock
        options, permit the grant of non-statutory share-based awards to paid
        consultants, and provide for the automatic grant of non-statutory share-based
        awards to outside directors. The plans may have options with terms of no
        more
        than ten years. The maximum terms of the options granted under these plans
        have
        been seven years with a maximum vesting of five years. The Company also has
        an
        employee stock purchase plan (ESPP) for employees to purchase its common
        stock
        at a discount. The ESPP provides for enrollment on the first day of a six-month
        period in which the employees can elect payroll deductions for the purchase
        of
        the Company’s common stock. The exercise date of the ESPP shall be the last day
        of the six month period and the purchase price shall be 85% of the fair market
        value of a share of common stock on the enrollment or exercise date, whichever
        is lower.
 
 Prior
        to
        July 1, 2005, the Company accounted for its stock plans under the
        provisions of APB No. 25, “Accounting for Stock Issued to Employees” (APB
        No. 25) and FASB Interpretation (FIN) No. 44, “Accounting for
        Certain Transactions Involving Stock Compensation - an Interpretation of
        APB
        Opinion No. 25” (FIN No. 44) and
        made
        pro forma footnote disclosures as required by Statement of Financial Accounting
        Standards (SFAS) No. 148, “Accounting For Stock-Based Compensation - Transition
        and Disclosure”, which amends SFAS No. 123, “Accounting For Stock-Based
        Compensation” .
        The
        Company adopted Statement of Financial Accounting Standards No. 123
        (revised 2004), Share-Based Payment (SFAS No. 123R), effective July 1, 2005
        using the modified-prospective-transition method. Accordingly, prior period
        amounts have not been restated. Under this transition method, share-based
        compensation expense recognized during the six months ended December 30,
        2005
        includes stock options granted prior to, but not yet vested as of July 1,
        2005, based on the grant-date fair value estimated in accordance with the
        original provisions of SFAS No. 123 and the following items based on the
        grant date values estimated in accordance with the provisions of SFAS No.
        123R:
        (a) stock options granted after June 30, 2005, (b) ESPP with offering periods
        commencing subsequent to June 30, 2005, (c) a stock purchase agreement
        issued to an employee that provides for the purchase of the Company’s stock at a
        discount and (d) stock issued to employees of the Company.
 
 The
        Company recognized share-based compensation expense of $266,000 during the
        six
        months ended December 30, 2005, which consisted of $65,000 related to employee
        stock options, $76,000 related to the employee stock purchase plan, $74,000
        related to an employee stock purchase agreement and $51,000 related to shares
        of
        the Company’s stock issued to employees in connection with the acquisition of
        Antin. The income tax benefit recognized related to the share-based compensation
        expense was $54,000. The estimated fair value of the Company’s share-based
        awards, less expected forfeitures, is amortized over the awards’ vesting period
        on a straight-line basis for awards granted after the adoption of SFAS No.
        123R
        and on a graded-vesting basis for awards granted prior to the adoption of
        SFAS
        No. 123R.
 
 On
        June
        29, 2005, the Board of Directors of SYS approved the acceleration of the
        vesting
        of all outstanding unvested stock options (the Acceleration). The Acceleration
        was effective for all such options outstanding on June 30, 2005, all of which
        were granted by the Company when the accounting rules permitted use of the
        intrinsic-value method of accounting for stock options. All of the other
        terms
        and conditions applicable to such outstanding stock option grants still apply.
        Under APB No. 25, the Acceleration resulted in recognition of share-based
        compensation expense of $51,000 which was determined by measuring the intrinsic
        value on the date of the modification of the options that otherwise would
        have
        expired unexercised. The Company's decision to accelerate the vesting of
        these
        options was in anticipation of compensation expense to be recorded in connection
        with outstanding unvested stock options issued to employees subsequent to
        the
        effective date of SFAS No. 123R issued in December 2004. As a result of the
        Acceleration, options to purchase 785,642 shares of the Company's common
        stock
        became immediately exercisable. If these options had not been accelerated,
        additional share-based compensation expense totaling $48,000 and $95,000
        would
        have been recognized in the three and six month periods ended December 30,
        2005,
        respectively, and a balance of $483,000 would have been recognized over a
        weighted average remaining vesting period of approximately 3.4 years. Holders
        of
        incentive stock options to purchase 246,800 shares of common stock elected
        to
        decline the acceleration of their options because the acceleration would
        have
        the effect of changing the status of such options for federal income tax
        purposes from an incentive stock option to a non-qualified stock
        option.
 
 The
        modified prospective transition method of SFAS No. 123R requires the
        presentation of pro forma information, for periods presented prior to the
        adoption of SFAS No. 123R, regarding net income and net income per share as
        if the Company had accounted for its stock plans under the fair value method
        of
        SFAS No. 123R. For pro forma purposes, fair value of stock options and ESPP
        awards was estimated using the Black-Scholes option valuation model. The
        fair
        value of all of the Company’s share-based awards was estimated assuming no
        expected dividends and estimates of expected life, volatility and risk-free
        interest rate at the time of grant.
 
  
  The
        following table illustrates the effect on net income and net income per share
        if
        the Company had accounted for its stock plans under the fair value method
        of
        accounting under SFAS No. 123R for the three and six month periods ended
        December 24, 2004:
 
 Three
                  Months
              
              
              Six
                  MonthsNet
                  income - as reported
              
              $
              256,000
              
              $
              560,000Add
                  total share-based employee compensation expense in reported net
                  income,
                  net of related tax effects
              
              
              --
              
              
              --Deduct
                  total share-based employee compensation expense determined under
                  fair
                  value based method for all stock option awards, net of tax
              
              
              (111,000
              )
              
              (186,000
              )Net
                  income - pro forma
              
              $
              145,000
              
              $
              374,000Basic
                  income per common share:As
                  reported
              
              $
              0.03
              
              $
              0.07Pro
                  forma
              
              $
              0.02
              
              $
              0.05Diluted
                  income per common share:As
                  reported
              
              $
              0.03
              
              $
              0.06Pro
                  forma
              
              $
              0.02
              
              $
              0.04
 
 The
        fair
        value of the Company’s share-based awards granted in the six-month period ended
        December 24, 2004 was estimated using the following weighted-average
        assumptions:
 
 Dividend
                  yield
              0.0%Expected
                  volatility
              49.0%Risk-free
                  interest rate
              3.4%Expected
                  lives
              4.50
 
 The
        maximum terms of the options granted under the Company’s stock option plans have
        been seven years with a maximum vesting of four years. At December 30,
        2005, the Company had 1,132,750 shares of common stock available for future
        grants under the 2003 Plan.
 
 The
        following table summarizes certain information regarding stock options during
        the six month period ended December 30, 2005:
 
 WeightedWeighted
              
              AverageAverage
              
              Remaining
              
              AggregateExercise
              
              Contractual
              
              IntrinsicShares
              
              Price
              
              Term
                  (Yrs)
              
              ValueBalance
                  outstanding at beginning of year
              
              
              2,391,100
              
              $
              1.95Granted
              
              
              283,000
              
              $
              3.85Exercised
              
              
              (168,850
              )
              $
              1.74Cancelled
              
              
              (5,150
              )
              $
              1.35Balance
                  outstanding at end of quarter
              
              
              2,500,100
              
              $
              2.18
              
              
              3.02
              
              $
              3,609,000Options
                  exercisable at end of quarter
              
              
              2,040,500
              
              $
              1.95
              
              
              2.48
              
              $
              3,313,000
 
 During
        the six months ended December 30, 2005, 1,027 shares of the Company’s
        outstanding stock at a value of $5,000 was exchanged upon the exercise of
        options.
 
 The
        total
        intrinsic value of options exercised during the six months ended December
        30,
        2005 was $309,000. As of December 30, 2005, there was $373,000 of total
        unrecognized compensation cost related to non-vested stock options granted
        and
        outstanding; that cost is expected to be recognized through fiscal year 2010,
        with a weighted average remaining period of 4.2 years. Cash received from
        stock
        option exercises was $288,000 during the six months ended December 30,
        2005.
 
 The
        2003
        Employee Stock Purchase Plan (ESPP) allows employees to designate a portion
        of
        their base compensation to be used to purchase the Company’s common stock at a
        purchase price per share at 85% of the lower of the fair market value on
        the
        first or last day of each offering period. Each offering period lasts six
        months. ESPP awards were valued using the Black-Scholes model with an expected
        life of 6 months, expected volatility of 48.37%, a 3.35% risk free interest
        rate
        and no expected dividends. As of December 30, 2005 there was no unrecognized
        compensation cost related to the employee stock purchase plan.
 
 On
        August
        16, 2005, the Company entered into a restricted stock purchase agreement
        with an
        employee as an inducement to employment. The agreement allowed the employee
        to
        purchase between 200,000 and 250,000 shares of the Company’s common stock by
        November 15, 2005. The purchase price was to be 90 percent of the average
        closing price between the date of the agreement and the purchase date but
        in no
        event less than $2.50 per share. The rights to purchase the shares vested
        one-half on September 30, 2005 and one-half on November 15, 2005. The Company
        valued this agreement using an option pricing model with an expected life
        of
        three months, expected volatility of 48.58%, a 3.52% risk free interest rate
        and
        no expected dividends. As of December 30, 2005 there was no unrecognized
        compensation cost related to this stock purchase agreement. On November 9,
        2005
        the Company and the employee determined that the employee would not be able
        to
        exercise his rights or fulfill his obligations within the terms of the
        agreement. As a result, the Company and the employee mutually agreed to,
        and
        executed, a rescission of the restricted stock purchase agreement.
 
 On
        September 12, 2005, SYS’s Board of Directors approved the issuance of an
        additional 25,130 shares of the Company’s common stock to be issued to the Antin
        stockholders, in addition to those shares still being held in escrow, as
        a
        result of a modification of a working capital purchase price adjustment provided
        for in the purchase agreement. One-half of the shares were issued directly
        to
        the Antin stockholders and the balance were placed in escrow which are
        contingently issuable to the stockholders based upon the future operating
        performance of Antin through June 30, 2006. As a result of the terms of a
        modification to the original working capital purchase price adjustment, the
        $51,000 value of the 12,565 shares issued directly to the Antin stockholders
        was
        treated as share-based compensation expense in the six months ended December
        30,
        2005. Once it becomes probable that the future performance criteria will
        be met,
        the remaining 12,565 shares held in escrow will be recorded as share-based
        compensation expense ratably in the period in which they are
        earned.
 
 **3.
        Accounts receivable:**
  Accounts
        receivables consist of the following:
  December
                  30,
              
              June
                  30,2005
              
              2005Amounts
                  billed
              
              $
              5,894,000
              
              $
              6,356,000Amounts
                  unbilled:Costs
                  and profits in excess of billings
              
              
              5,244,000
              
              
              4,321,000Retentions,
                  due upon completion of contracts
              
              
              165,000
              
              
              154,000Recoverable
                  costs subject to closure of contracts
              
              
              255,000
              
              
              209,000Allowance
                  for doubtful accounts
              
              
              (107,000
              )
              
              (48,000
              )Totals
              
              $
              11,451,000
              
              $
              10,992,000
 
 At
        December 30, 2005, costs and profits in excess of billings consisted of amounts
        billable subsequent to period-end.
 
 The
        balances comprising receivables pursuant to retainage provisions will be
        due
        upon completion of the contracts and audits of overhead rates by the Defense
        Contract Audit Agency (DCAA). Recoverable costs subject to closure of contracts
        consisted primarily of revenues recognized on specific delivery orders as
        a
        result of actual indirect expense rates exceeding the provisionally approved
        indirect rates. These receivables will be billable upon closure of DCAA audits
        of overhead rates of the specific delivery orders or the contracts. Based
        on the
        Company’s experience with similar contracts in recent years, the balances at
        December 30, 2005 are expected to be collected in fiscal 2006, 2007 and 2008.
        In
        accordance with industry practice, the amounts in unbilled that may be collected
        beyond the next twelve months are included in current assets.
  
 
  
  **4.
        Inventory**
 
 Inventory
        consisted of the following:
  December
                  30,
              
              June
                  30,2005
              
              2005Raw
                  materials
              
              $
              505,000
              
              $
              54,000Work
                  in process
              
              
              10,000
              
              
              7,000Finished
                  goods
              
              
              219,000
              
              
              36,000$
              734,000
              
              $
              97,000
 
 **5.
        Intangible Assets and Goodwill:**
 
 Intangible
        assets consist of the following:
 
 WeightedAverage
              
              GrossAmortization
              
              Carrying
              
              AccumulatedPeriod
                  (Yrs)
              
              Value
              
              Amortization
              
              NetDecember
                  30, 2005Technology
              
              
              5
              
              $
              1,022,000
              
              $
              133,000
              
              $
              889,000Customer
                  contracts
              
              
              9
              
              
              670,000
              
              
              89,000
              
              
              581,000Patents
              
              
              15
              
              
              280,000
              
              
              19,000
              
              
              261,000All
                  other intangibles
              
              
              2
              
              
              480,000
              
              
              268,000
              
              
              212,000$
              2,452,000
              
              $
              509,000
              
              $
              1,943,000June
                  30, 2005Technology
              
              
              5
              
              $
              390,000
              
              $
              71,000
              
              $
              319,000Customer
                  contracts
              
              
              10
              
              
              520,000
              
              
              50,000
              
              
              470,000Patents
              
              
              15
              
              
              280,000
              
              
              10,000
              
              
              270,000All
                  other intangibles
              
              
              2
              
              
              313,000
              
              
              184,000
              
              
              129,000$
              1,503,000
              
              $
              315,000
              
              $
              1,188,000
 
 Goodwill:
 
 The
        purchase agreement for Xsilogy, Inc., acquired in December 2004, provides
        for
        additional consideration to be earned upon achieving certain milestones.
        As a
        result of a determination during the quarter ended September 30, 2005 that
        certain milestones had been met as of June 30, 2005, Xsilogy was paid cash
        of
        $315,000 and issued 80,000 shares of SYS stock at a value of $376,000. The
        total
        of this consideration was first used to eliminate the contingent consideration
        liability of $97,000 and the balance of $594,000 was recorded as goodwill.
 
 The
        carrying value of Xsilogy related assets at December 30, 2005 was $1,448,000,
        which included intangible assets of $464,000 and goodwill of $608,000. Since
        the
        date of acquisition in December 2004 there has been minimal direct product
        sales
        and cash flow generated from the deployment of these assets. However, the
        technology acquired from Xsilogy has been and continues to be integrated
        into
        several products being developed under contract with SYS customers and is
        being
        deployed as originally intended. The recoverability of the carrying value
        of
        these assets are assessed on a regular basis. If there is not a significant
        improvement in the cash flow generated from these assets in a reasonable
        period
        of time or other evidence of recoverability, consideration of an impairment
        charge may be appropriate in a future period.
 
  
  **6.
        Notes payable and other debt**
  Notes
        payable at December 30, 2005 and June 30, 2005 are as follows:
 Related
                  PartyDecember
                  30,
              
              June
                  30,
              
              December
                  30,
              
              June
                  30,2005
              
              2005
              
              2005
              
              2005Convertible
                  notes payable, unsecured, bear interest at 10% payable quarterly,
                  originally due at various dates starting in November 2004 but extended
                  at
                  option of noteholders to various dates starting in November 2005,
                  convertible at any time into common stock at the rate of $1.00
                  per
                  share.
              
              $
              --
              
              $
              319,000
              
              $
              --
              
              $
              388,000Convertible
                  notes payable, unsecured, bear interest at 10% per annum payable
                  quarterly, due December 31, 2006, convertible at any time into
                  common
                  stock at a rate of $2.20 per share.
              
              
              825,000
              
              
              887,000
              
              
              713,000
              
              
              713,000Unamortized
                  discount related to convertible notes payable due December 31,
                  2006
              
              
              (26,000
              )
              
              (40,000
              )
              
              (23,000
              )
              
              (32,000
              )Convertible
                  notes payable, issued in conjunction with Polexis acquisition,
                  unsecured
                  and subordinate to the Company's bank debt, bear interest at 10%
                  per annum
                  payable quarterly, due March 31, 2007, convertible at any time
                  into common
                  stock at the rate of $2.32 per share.
              
              
              458,000
              
              
              589,000
              
              
              96,000
              
              
              96,000Convertible
                  note payable, issued in conjunction with Antin acquisition, unsecured
                  and
                  subordinate to the Company’s bank debt, bears interest at 10% per annum
                  payable quarterly, due May 11, 2007, convertible at any time into
                  common
                  stock at the rate of $2.50 per share.
              
              
              --
              
              
              --
              
              
              196,000
              
              
              196,000Note
                  payable issued in conjunction with Webtech acquisition, unsecured,
                  bears
                  interest at 10% per annum, paid February 9, 2006
              
              
              100,000
              
              
              --
              
              
              --
              
              
              --1,357,000
              
              
              1,755,000
              
              
              982,000
              
              
              1,361,000Less
                  current portion
              
              
              (100,000
              )
              
              (319,000
              )
              
              --
              
              
              (388,000
              )$
              1,257,000
              
              $
              1,436,000
              
              $
              982,000
              
              $
              973,000
 
  
  During
        the six months ended December 30, 2005, holders of $898,000 of convertible
        notes
        payable elected to convert the notes payable into 790,994 shares of common
        stock.
  The
        Company has a bank line of credit facility which provides for borrowings
        of up
        to $4,000,000. This facility expires in December 2006, contains financial
        and
        other covenants, and is collateralized by substantially all of the assets
        of the
        Company. Borrowings pursuant to the line of credit bear interest at the bank’s
        prime rate (7.5% as of December 30, 2005) plus 0.25%. As of December 30,
        2005,
        the Company had $572,000 of borrowings outstanding under this line of
        credit.
  **7.
        Earnings Per Share**
  Basic
        net
        income per common share is calculated by dividing net income applicable to
        common stock by the weighted average number of common shares outstanding
        during
        the period. The calculation of diluted net income per common share is similar
        to
        that of basic net income per common share, except that the denominator is
        increased to include the number of additional common shares that would have
        been
        outstanding if all potentially dilutive common shares, principally those
        issuable upon the conversion of notes payable and the exercise of stock options
        and warrants, were issued during the period.
 
 The
        following table summarizes the calculation of basic and diluted net income
        per
        common share for each period:
 
 Three
                  Months Ended
              
              Six
                  Months EndedDecember
                  30,
              
              December
                  24,
              
              December
                  30,
              
              December
                  24,2005
              
              2004
              
              2005
              
              2004Numerators:Net
                  income
              
              $
              194,000
              
              $
              256,000
              
              $
              669,000
              
              $
              560,000Add
                  back - interest expense on convertible notes, net of tax
                  effects
              
              
              --
              
              
              52,000
              
              
              --
              
              
              108,000Net
                  income applicable to common stockholders- diluted
              
              $
              194,000
              
              $
              308,000
              
              $
              669,000
              
              $
              668,000Denominators:Weighted
                  average shares for basic net income per common share
              
              
              11,870,848
              
              
              8,159,177
              
              
              11,373,238
              
              
              8,156,426Add
                  dilutive effect of assumed exercise of stock options and warrants
                  using
                  the treasury stock method
              
              
              1,144,410
              
              
              688,644
              
              
              1,060,779
              
              
              730,513Add
                  dilutive effect of other share based compensation awards
              
              
              75,056
              
              
              --
              
              
              55,611
              
              
              --Add
                  dilutive effect of assumed conversion of convertible promissory
                  notes
              
              
              --
              
              
              2,036,272
              
              
              --
              
              
              2,036,272Weighted
                  average shares for diluted net income per common share
              
              
              13,090,314
              
              
              10,884,093
              
              
              12,489,628
              
              
              10,923,211Basic
                  net income per common share
              
              $
              0.02
              
              $
              0.03
              
              $
              0.06
              
              $
              0.07Diluted
                  net income per common share
              
              $
              0.01
              
              $
              0.03
              
              $
              0.05
              
              $
              0.06
 
  
  
 The
        following is a table of the weighted averages shares excluded from the
        calculation of diluted net income per common share because their effect would
        be
        anti-dilutive:
 Three
                  Months Ended
              
              Six
                  Months EndedDecember
                  30,
              
              December
                  24,
              
              December
                  30,
              
              December
                  24,2005
              
              2004
              
              2005
              
              2004Options
                  with exercise price in excess of average market price
              
              
              110,554
              
              
              312,000
              
              
              200,196
              
              
              312,000Shares
                  issuable upon conversion of notes payable
              
              
              1,354,342
              
              
              --
              
              
              1,574,485
              
              
              --Total
                  shares excluded
              
              
              1,464,896
              
              
              312,000
              
              
              1,774,681
              
              
              312,000
 
 
 **8.
        Legal Matters:**
 
 Periodically,
        we are involved in legal actions in the normal course of business, including
        audits and investigations by various governmental agencies that result from
        our
        work as a governmental contractor. There are currently no such legal matters
        outstanding.
  **9.
        Stockholders’ Equity:**
 
 In
        addition to the share-based compensation transactions and other equity
        transactions described elsewhere, the following is a summary of other changes
        to
        stockholder’s equity during the six month period ended
        December 30, 2005:
 
 Issuance
        of shares to participants of the ESPP of 88,719 shares valued at $196,000
        in
        satisfaction of the liability at June 30, 2005.
 
 Contribution
        to the Company’s ESOP/401(k) plan of 103,007 shares valued at
        $394,000.
 
 Holders
        of warrants issued in connection with the Company’s sale of common stock in June
        2005 exercised warrants to purchase 114,888 shares at an exercise price of
        $2.50
        per share or $287,000. As of December 30, 2005, there were outstanding
        warrants related to this sale of common stock that are exercisable into 313,401
        shares of common stock at $2.50 per share.
 
 **10.
        Acquisitions:**
 
 **Acquisition
        of Web Tech:**
 
 Effective
        on August 22, 2005, the Company acquired the assets of  Web
        Technologies, LLC (Web Tech).  The acquisition was to further the Company's
        goal of acquiring technology companies which expand our products and customer
        base.  This asset acquisition was accounted for as a business combination
        under the purchase method and accordingly, Web Tech’s results of operations are
        included in the Company’s consolidated results of operations commencing on
        August 22, 2005. The consideration consisted of $140,000 cash and an additional
        $100,000 due January 31, 2006. The total acquisition costs of $315,000,
        including transaction costs of $75,000 has been allocated on a preliminary
        basis
        as follows: Equipment- $100,000, Intangible assets- $215,000. The intangible
        assets are being amortized over an average of four years. The Company expects
        to
        finalize the determination of the fair value of the assets acquired in the
        third
        quarter of 2006.
 
 **Acquisition
        of Lomasoft Technology and Intellectual Property:**
 
 On
        September 27, 2005, the Company entered into an agreement to purchase certain
        technology and intellectual property rights related to the ForceViz technology
        of Lomasoft Corporation. The purchase price consisted of $50,000 cash and
        warrants to purchase 50,000 shares of the Company’s stock at a price of $3.87
        per share. Transaction costs totaled $12,000. The $65,000 fair value of the
        warrants was based on the Black Scholes model using a 34% expected volatility
        rate, 4% risk-free interest rate, an estimated life of five years and assumed
        no
        dividends. The agreement provides for additional contingent consideration
        of
        warrants to purchase 50,000 shares of SYS common stock at a price equal to
        $3.87
        per share for each of the two revenue-based milestones for the years ending
        June
        30, 2006 and 2007. All of the warrants will have a five year exercise period
        and
        piggy-back registration rights. The total acquisition costs of $127,000,
        including $12,000 of transaction costs, has been allocated to intangible
        assets
        and is being amortized over 7 years. This transaction was accounted for as
        an
        asset purchase and not a business combination.
 
 **Acquisition
        of Logic Innovations:**
 
 On
        November 7, 2005, SYS acquired all of the outstanding stock of Logic
        Innovations, Inc. (“Logic”), a privately held, San Diego-based provider of
        solutions that ensure the fast and efficient delivery of digital audio, video
        and data to the broadcasting, communications and consumer electronics industries
        for approximately $4,031,000 in cash and stock.  The acquisition was to
        further the Company's goal of acquiring technology companies which expand
        our
        products and customer base.
 
 The
        transaction was completed pursuant to an Agreement and Plan of Merger
        (Agreement) by and among the Company, Shadow II, Inc. (a wholly-owned subsidiary
        of the Company), Logic and all of the stockholders of Logic. As a result
        of the
        acquisition, Shadow II became a wholly owned subsidiary of SYS and, therefore,
        will be included in the consolidated financial results of SYS effective for
        periods subsequent to November 7, 2005.
  The
        merger consideration consisted of $2,000,000 in cash and 445,768 shares of
        restricted SYS common stock with a value of $2,031,000 based on an average
        closing price of $4.56. Additional consideration may be earned subject to
        achieving future revenue and operating income targets.
 
 The
        transaction was accounted for using the purchase method whereby the net
        tangible and intangible assets acquired and liabilities assumed were recognized
        at their estimated fair market values at the date of acquisition, based on
        preliminary estimates made by management. A
        valuation will be performed to determine the purchase price allocation based
        upon the fair value of the assets and liabilities acquired, at which time
        the
        allocation of purchase price may be revised. Management expects to complete
        the
        valuation during the third quarter of the current fiscal year. The
        following table summarizes the preliminary fair values of the assets and
        liabilities of Logic at the date of acquisition:
 
 EstimatedLife
                  inValue
              
              YearsCash
              
              $
              157,000Accounts
                  receivable
              
              
              100,000Prepaid
                  expenses
              
              
              38,000Inventory
              
              
              300,000Property,
                  furniture and equipment, net
              
              
              40,000
              
              
              2-5Other
                  assets
              
              
              17,000Customer
                  relationships
              
              
              100,000
              
              
              10Technology
              
              
              200,000
              
              
              5Trade
                  name
              
              
              100,000
              
              
              7Goodwill
              
              
              3,655,000Total
                  assets acquired
              
              
              4,707,000Accounts
                  payable
              
              
              (106,000
              )Accrued
                  payroll and related expenses
              
              
              (61,000
              )Other
                  accrued liabilities
              
              
              (363,000
              )4,177,000Less
                  cash acquired
              
              
              (157,000
              )Net
                  assets acquired
              
              $
              4,020,000
 
 The
        excess of the Company’s total acquisition costs of $4,177,000, including
        transaction costs of $145,000, over the estimated fair value of the net assets
        acquired was allocated to goodwill as part of the Public Safety,
        Security and Industrial Systems Group segment.  The goodwill is not
        subject to amortization and none of the amount assigned to goodwill is
        deductible for tax purposes.
 
  
  **Acquisition
        of cVideo:**
 
 On
        December 2, 2005, SYS acquired all of the assets and assumed certain specified
        liabilities of cVideo, Inc., a San Diego based provider of interactive video
        and
        information analysis products for business surveillance and security
        applications. The acquisition was to further the Company's goal of acquiring
        technology companies which expand our products and customer base. The
        purchase price consisted of approximately $1,868,000 of cash to the seller
        and
        various creditors as initial consideration and additional contingent
        consideration based on future revenue milestones.
 
 The
        transaction was accounted for using the purchase method whereby the net
        tangible and intangible assets acquired and liabilities assumed were recognized
        at their estimated fair market values at the date of acquisition, based on
        preliminary estimates made by management. A
        valuation will be performed to determine the purchase price allocation based
        upon the fair value of the assets and liabilities acquired, at which time
        the
        allocation of purchase price may be revised. Management expects to complete
        the
        valuation during the third quarter of the current fiscal year. The
        following table summarizes the preliminary fair values of the assets and
        liabilities of cVideo at the date of acquisition:
 
 EstimatedLife
                  inValue
              
              YearsAccounts
                  receivable
              
              $
              117,000Prepaid
                  expenses
              
              
              55,000Inventory
              
              
              261,000Property,
                  furniture and equipment, net
              
              
              37,000
              
              
              2-5Other
                  assets
              
              
              22,000Technology
                  and patents
              
              
              200,000
              
              
              5Goodwill
              
              
              1,732,000Total
                  assets acquired
              
              
              2,424,000Accounts
                  payable
              
              
              (17,000
              )Accrued
                  payroll and related expenses
              
              
              (186,000
              )Other
                  accrued liabilities
              
              
              (245,000
              )Net
                  assets acquired
              
              $
              1,976,000
 
 The
        excess of the Company’s total acquisition costs of $1,976,000, including
        transaction costs of $108,000, over the estimated fair value of the net assets
        acquired was allocated to goodwill.  The goodwill is not subject to
        amortization and none of the amount assigned to goodwill is deductible for
        tax
        purposes.
 
 **Pro
        Forma Results of Operations:**
 
 On
        December 14, 2004, the Company acquired the assets and assumed certain
        liabilities of Xsilogy, Inc. (Xsilogy). On January 3, 2005, the Company acquired
        all of the outstanding securities of Antin Engineering, Inc. (Antin). As
        discussed above, on August 22, 2005 the Company acquired a business from
        Web
        Tech, on November 7, 2005 the Company acquired the outstanding stock of Logic,
        and on December 2, 2005 the Company acquired the assets of cVideo. The following
        summary presents pro forma consolidated results of operations for the three
        and
        six month periods ended December 30, 2005 and December 24, 2004 as if all
        of
        these acquisitions had occurred as of the beginning of the periods presented
        and
        includes adjustments that were directly attributable to the transaction or
        were
        expected to have a continuing impact on the Company.
   
  The
        pro
        forma results are unaudited and for illustrative purposes only for the
        applicable period, and do not purport to be indicative of the actual results
        which would have occurred had the transactions been completed as of the
        beginning of the period, nor are they indicative of results of operations
        which
        may occur in the future.
  December
                    30, 2005
                
                December
                    24, 2004As
                    Reported
                
                Pro
                    Forma
                
                As
                    Reported
                
                Pro
                    FormaThree
                    Month periods:Revenues
                
                $
                12,448,000
                
                $
                12,782,000
                
                $
                10,462,000
                
                $
                15,658,000Operating
                    income
                
                
                425,000
                
                
                (128,000
                )
                
                566,000
                
                
                596,000Net
                    income
                
                
                194,000
                
                
                (122,000
                )
                
                256,000
                
                
                361,000Net
                    income per common share:Basic
                
                $
                0.02
                
                $
                (
                    0.01
                )
                $
                0.03
                
                $
                0.04Fully
                    diluted
                
                $
                0.01
                
                $
                (
                    0.01
                )
                $
                0.03
                
                $
                0.03Weighted
                    average shares outstanding:Basic
                
                
                11,870,848
                
                
                12,056,993
                
                
                8,159,177
                
                
                8,928,916Fully
                    diluted
                
                
                13,090,314
                
                
                13,276,459
                
                
                10,884,093
                
                
                11,981,812
 December
                  30, 2005
              
              December
                  24, 2004As
                  Reported
              
              Pro
                  Forma
              
              As
                  Reported
              
              Pro
                  FormaSix
                  Month periods:Revenues
              
              $
              25,542,000
              
              $
              27,110,000
              
              $
              21,569,000
              
              $
              30,574,000Operating
                  income
              
              
              1,306,000
              
              
              322,000
              
              
              1,180,000
              
              
              957,000Net
                  income (loss)
              
              
              669,000
              
              
              (78,000
              )
              
              560,000
              
              
              383,000Net
                  income per common share:Basic
              
              $
              0.06
              
              $
              (
                  0.01
              )
              $
              0.07
              
              $
              0.04Fully
                  diluted
              
              $
              0.05
              
              $
              (
                  0.01
              )
              $
              0.06
              
              $
              0.04Weighted
                  average shares outstanding:Basic
              
              
              11,373,238
              
              
              11,689,904
              
              
              8,156,426
              
              
              8,926,165Fully
                  diluted
              
              
              12,489628
              
              
              12,806,294
              
              
              10,923,211
              
              
              12,020,930
  The
        basic
        and fully diluted shares outstanding have been adjusted to give effect to
        the
        issuance of 323,971 shares at the time of the Antin acquisition, 327,980
        shares
        that were subsequently issued related to contingent consideration for Antin
        and
        Xsilogy, and the issuance of 445,768 shares related to the acquisition of
        Logic.
 
 **11.
        Segment Information:**
  During
        the year ended June 30, 2005, the Company reported operating results and
        financial data for two reporting segments: Defense Solutions Group (DSG)
        and the
        Sensor Networking Systems and Products Group (SNG). DSG provided engineering,
        technical, and financial and management services primarily to U.S. Government
        customers. SNG was formed subsequent to the acquisition of the assets of
        Xsilogy
        to provide wireless sensor network technologies and applications to a broad
        base
        of customers including commercial and industrial customers as well as the
        U.S.
        Government. In March 2005, the Company formed a Public Safety and Security
        Division (PSS) as a component for DSG. Antin has been included in the DSG
        segment.
 
  
  Effective
        July 1, 2005 the activities of the SNG and PSS were reorganized into a new
        business group named the Public Safety, Security and Industrial Systems Group
        (PSSIG). This group became a reportable business segment in place of the
        SNG for
        reporting in fiscal year 2006. Revenues in this group include products and
        equipment sales, software, engineering and installation services for industrial
        and commercial customers as well as government customers. Prior year amounts
        have been reclassified to reflect the inclusion of SNG and PSS into the new
        PSSIG segment. Logic and cVideo have been included in the PSSIG segment.
        The
        following information is for the three and six month periods ended
        December  30,
        2005
        and December 24, 2004:
 
 Three
                  Months Ended
              
              Six
                  Months Ended2005
              
              2004
              
              2005
              
              2004Revenue:DSG
              
              $
              10,970,000
              
              $
              9,862,000
              
              $
              23,072,000
              
              $
              20,822,000PSSIG
              
              
              1,478,000
              
              
              600,000
              
              
              2,470,000
              
              
              747,000Totals
              
              $
              12,448,000
              
              $
              10,462,000
              
              $
              25,542,000
              
              $
              21,569,000Income
                  from operations:DSG
              
              $
              353,000
              
              $
              548,000
              
              $
              1,168,000
              
              $
              1,152,000PSSIG
              
              
              72,000
              
              
              18,000
              
              
              138,000
              
              
              28,000Totals
              
              $
              425,000
              
              $
              566,000
              
              $
              1,306,000
              
              $
              1,180,000Capital
                  expenditures:DSG
              
              $
              108,000
              
              $
              249,000
              
              $
              206,000
              
              $
              319,000PSSIG
              
              
              97,000
              
              
              --
              
              
              186,000
              
              
              --Totals
              
              $
              205,000
              
              $
              249,000
              
              $
              392,000
              
              $
              319,000Depreciation
                  and amortization:DSG
              
              $
              187,000
              
              $
              109,000
              
              $
              333,000
              
              $
              226,000PSSIG
              
              
              70,000
              
              
              --
              
              
              126,000
              
              
              --Totals
              
              $
              257,000
              
              $
              109,000
              
              $
              459,000
              
              $
              226,000December
                  30, 2005
              
              
              June
                  30, 2005Identifiable
                  assets:DSG
              
              $
              26,707,000
              
              $
              23,953,000PSSIG
              
              
              3,236,000
              
              
              802,000Totals
              
              $
              29,943,000
              
              $
              24,755,000Goodwill:DSG
              
              $
              7,489,000
              
              $
              7,309,000PSSIG
              
              
              5,811,000
              
              
              --Totals
              
              $
              13,300,000
              
              $
              7,309,000
 
  
  **Item
        2****.****Management’s
        Discussion and Analysis o****f
        Financial Condition and Results of Operations**
 
 *To
        the extent that the information presented in this quarterly report discusses
        financial projections, information or expectations about our business plans,
        results of operations, products or markets, or otherwise makes statements
        about
        future events, such statements are forward-looking. Such forward-looking
        statements can be identified by the use of words such as “intends”,
“anticipates”, “believes”, “estimates”, “projects”, “forecasts”, “expects”,
“plans” and “proposes”.*
 
 *Although
        we believe that the expectations reflected in the forward-looking statements
        are
        reasonable, we cannot guarantee future results, levels of activity, performance
        or achievements. Moreover, neither we, nor any other person, assume
        responsibility for the accuracy and completeness of the forward-looking
        statements. We are under no obligation to update any of the forward-looking
        statements after the filing of this Quarterly Report on Form 10-Q to conform
        such statements to actual results or to changes in our
        expectations.*
 
 *The
        following discussion should be read in conjunction with our unaudited
        consolidated financial statements and the related notes and other financial
        information appearing elsewhere in this Form 10-Q. Readers are also urged
        to
        carefully review and consider the various disclosures made by us which attempt
        to advise interested parties of the factors which affect our business, including
        without limitation the disclosures made under the caption “Management’s
        Discussion and Analysis of Financial Condition and Results of Operations,” under
        the caption “Risks Related to Our Business,” and the audited consolidated
        financial statements and related notes included in our Annual Report filed
        on
        Form 10-KSB for the year ended June 30, 2005 and other reports and filings
        made
        with the Securities and Exchange Commission.*
  **Overview**
 SYS
          and
          its subsidiaries provide information connectivity solutions that capture,
          analyze and present real-time information to decision makers. The Company’s
          tailored solutions deliver enhanced decision-making, asset management and
          reduction of response times to its customers, which include the Department
          of
          Defense, Department of Homeland Security and large industrial, energy,
          and
          transportation companies. Built upon standards-based interoperable platforms,
          SYS Technologies’ solutions utilize sensors, wireless communications networks,
          decision-support tools and Net-centric technologies. Founded in 1966, SYS
          is
          headquartered in San Diego and has principal offices in California, Virginia
          and
          Washington, DC. For additional information, visit www.systechnologies.com .
  We
        enhance situational awareness in battlefield, environmental disaster and
        crisis
        environments for our national security customers. We optimize utilization
        of
        remote assets for our industrial, energy and transportation customers. We
        also
        provide solution lifecycle support with program, financial, test and logistical
        services, including classroom and online training.
 
 Historically,
        our revenues have been generated by providing services to the Department
        of
        Defense (DoD). While we are continuing to grow our DoD business, we also
        have a
        growing revenue base with other U.S. Government agencies including the
        Department of Homeland Security (DHS), Defense Advanced Research Program
        Administration (DARPA), Defense Systems Information Agency (DISA), municipal
        and
        state governments, and Fortune 1000 companies in the industrial marketplace.
 
 The
        Company has two reportable business segments. The Defense Solutions Group
        (DSG)
        and the Public Safety, Security and Industrial Systems Group (PSSIG).
 
 The
        DSG
        provides engineering, technical, and financial management services primarily
        to
        U.S. Government customers including the DoD and other agencies. The business
        of
        the DSG can be further categorized into two broad categories, namely (i)
        Command, Control, Computers, Communications, Intelligence, Surveillance and
        Reconnaissance (C4ISR) and (ii) legacy businesses. The C4ISR business supports
        agencies and organizations of the DoD and the Department of Homeland Security
        (DHS) by providing systems engineering and systems integration, software
        development, geospatial information systems and situational awareness tools.
        The
        legacy business supports a broad spectrum of program management, infrastructure
        management and business operations functions principally for U.S. Government
        or
        DoD customers.
 
 The
        PSSIG
        was formed on July 1, 2005 to consolidate the activities previously performed
        in
        the (i) Sensor Networking Systems and Products Group (ii) the Public Safety
        and
        Security Division and (iii) programs previously captured in the DSG where
        the
        activities were focused on public safety and security. This group leverages
        the
        capabilities acquired through prior acquisitions together with our other
        core
        capabilities including software integration and geospatial information
        processing, as well as our success on similar projects. The PSSIG offers
        a
        comprehensive solution to our customer base addressing homeland security
        and
        business security issues at the federal, state, and local levels.
 
 The
        PSSIG
        draws on technical resources throughout SYS to effect timely and reliable
        solutions to meet the command and response needs of fire and law enforcement
        as
        well as other agencies in crisis environments. The scope of this effort involves
        the application of existing SYS sensor technology, wireless sensor networking,
        the application of service oriented internet architectures, information
        visualization, and decision support technologies. The formation of this new
        group reflects our commitment to applying our technology base to solving
        homeland security and homeland defense issues.
 
 During
        the second quarter we completed two additional acquisitions the results of
        which
        will be included in the PSSIG operating segment:
 
 ·
              The
                  first, Logic Innovations, Inc. (Logic) is a leading provider of
                  innovative
                  broadcast solutions that ensure the fast and efficient delivery
                  of digital
                  audio, video and data to the broadcasting, satellite, communications
                  and
                  consumer electronics industries. Applications for Logic’s products include
                  the television broadcast industry for the delivery of broadcast
                  content;
                  satellite service providers for the delivery of advanced video
                  and data
                  services over its video networks; corporations for internal distributed
                  learning and/or financial information distribution; and government,
                  for
                  use in monitoring and surveillance
                  applications;
 
 ·
              The
                  second, cVideo Inc. (cVideo)is
                  a developer of software-based integrated digital video applications
                  used
                  in video surveillance, integrated security, and loss prevention
                  solutions
                  for industrial and governmental applications. Specific market segments
                  include point-of-sale, central alarm monitoring, and other video
                  surveillance applications. The products utilize patented software-based
                  video compression source code. cVideo’s software applications are designed
                  to make video more practical by improving the usability of video
                  and data
                  to impact the customer’s bottom line. It is the goal of SYS Technologies
                  to make the cVideo product line interoperable with our Vigilys
                  command
                  response system for first responders. SYS will provide the video
                  surveillance package as a value added component to our baseline
                  system.
 
 Our
        revenues have grown internally by establishing new business units with
        experienced senior executives who have the ability to grow these business
        units
        and expand our customer base and through acquisitions of other government
        and
        non-government technology companies. Our objective is to continue growing
        revenues organically and through acquisitions. In order to assist in
        accomplishing this objective, we have continued to increase our selling,
        general
        and administrative expenditures so as to increase our efforts in new business
        development and to provide the necessary infrastructure to support a larger
        organization. We plan to selectively acquire businesses and technologies
        that
        complement and enhance our existing businesses and will allow us to broaden
        our
        customer base. Although there can be no assurances, we expect each of the
        acquisitions to be capable of being profitable on a stand-alone basis within
        2-3
        quarters after acquisition. We are currently reviewing additional potential
        targets. We anticipate that we will need to obtain additional financing through
        the sale of equity or debt securities to fund these acquisitions. Our research
        and development activities are primarily oriented towards developing the
        products of our acquisitions with the intent of accelerating the development
        cycle and increasing sales.
 
 We
        expect
        that this operating strategy will continue and we also expect that
        with the expanded capabilities we’ve acquired, together with our existing
        capabilities that we will be able to bid on larger government contracts and
        programs. We also expect to continue to participate in recompetes on our
        existing engineering and management contracts. Our rate of revenue growth
        depends upon many factors, including, among others, our success in bidding
        on
        new contracts and re-competes of our existing contracts, the continuation
        of our
        existing programs, the rate of demand for services or products under our
        contracts, the funding levels for our contracts, our ability to meet demand
        for
        our services or products, and the ability to grow the businesses of our acquired
        companies.
 
 Our
        gross
        margins (revenues less contract costs) are affected by the mix of contract
        types
        (cost reimbursement, fixed-price or time and materials) as well as the mix
        of
        prime contracts versus subcontracts. Further, with the recent inclusion of
        products based companies such as Logic and cVideo, our gross margins will
        be
        affected by the cost and availability of materials and components, product
        mix
        and other fixed and variable costs. Significant portions of our contracts
        are
        time and materials and cost reimbursement contracts. Subject to contract
        limits,
        we are reimbursed for labor hours at negotiated hourly billing rates and
        other
        direct expenses under time and materials contracts and reimbursed for all
        actual
        costs, plus a fee, or profit, under reimbursement contracts. The financial
        risks
        under these contracts are generally lower than those associated with other
        types
        of contracts, and margins are also typically lower than those on fixed-price
        contracts. The U.S. Government also has awarded us fixed-price contracts.
        Such
        contracts carry higher financial risks because we must deliver the products,
        systems or contract services at a cost below the fixed contract value in
        order
        to earn a profit.
 
 We
        have
        derived a majority of our revenues from U.S. Government contracts under which
        we
        act as a prime contractor. We also provide services indirectly as a
        subcontractor. We intend to focus on retaining and increasing the percentage
        of
        our business as prime contractor because it provides us with client
        relationships that generate higher levels of revenue.  Currently our mix of
        contracts consists of approximately 61% prime contracts and 39%
        subcontracts.
 
 As
        of
        December 30, 2005, the Company’s delivery order and contract tasking backlog for
        the DSG business totaled approximately $33.0 million, of which $16.0 million
        was
        funded and $17.0 million had been ordered, but not yet funded.  As of
        December 24, 2004 the delivery order and contract tasking backlog totaled
        approximately $ 36.0 million, of which $18.0 million was funded and $18.0
        million had been ordered, but not yet funded. Backlog yet to be funded is
        generally funded on an incremental basis.
 
 All
        of
        our U.S. government contracts are subject to audit and various cost controls,
        and include standard provisions for termination for the convenience of the
        U.S.
        government. Multi-year U.S. government contracts and related orders are subject
        to cancellation if funds for contract performance for any subsequent year
        become
        unavailable.
 
 Management
        currently considers the following events, trends and uncertainties to be
        important to understanding its financial condition and operating performance.
        Almost all of the areas that generate opportunities for SYS also generate
        risks
        at the same time. The following demonstrates some of these opportunities
        and
        risks for several areas.
 
 ·
              **Contract
                  Type**.
                  Federal Government contracting practices tends to run in cycles.
                  The
                  preferred form of contracting varies and ranges from large contracts
                  with
                  multiple subcontractors and wide areas of work scope to small contracts
                  with more specific areas of scope. Unless the Government has a
                  very
                  specific requirement most of this work is done on an Indefinite-Delivery,
                  Indefinite-Quantity type of contract. In general, the Government
                  is now
                  trending towards issuing large Multiple Award Contracts (“MAC’s”) where
                  multiple winners continue to compete on a task by task basis. This
                  trend
                  was reinforced through the SeaPort-Enhanced MAC contract that is
                  envisioned to become a key contracting component for NAVSEA in
                  the future
                  and be of great potential benefit to SYS. All tasks awarded under
                  the
                  SeaPort-Enhanced MAC type contracts will be competitively bid among
                  all
                  eligible MAC holders. In addition, the cost plus nature of these
                  tasks
                  reduces performance risks but lowers the opportunity to make larger
                  fees.
 
 The
                  task awards are frequently awarded on a cost reimbursable basis,
                  cover a
                  broader spectrum of activity and in general favor large businesses.
                  SYS
                  has been awarded a SeaPort-Enhanced contract which offers opportunity
                  for
                  SYS to bid on areas that it might not otherwise have an opportunity
                  to
                  bid. On the other hand, if the scope of the task is too large it
                  may
                  exceed SYS’ ability to respond. Despite the desire of upper level
                  Government management to convert these contracts to fixed price
                  contracts
                  this is not usually achieved due to a lack of well defined specifications
                  of the work to be performed. Thus, increasingly SYS is competing
                  with
                  larger companies for cost reimbursable contract opportunities that
                  do not
                  effectively consider innovation in the pricing evaluation and favor
                  larger
                  businesses doing business as usual where they may have a competitive
                  pricing advantage and the advantage of performing on a larger scope
                  of
                  work. Reduction of this risk will depend on SYS’ ability to convince the
                  Government that they can get better product at a better value by
                  issuing
                  more focused tasks versus large generic
                  tasks.
 
 In
                  addition, SYS will pursue time and materials or fixed price contracts
                  where SYS can be more agile and creative with process, technology,
                  expertise, and management functions to provide a solution and to
                  reduce
                  the price for the customer.
 
  
  The
        following table shows our revenues from each of these types of contracts
        as a
        percentage of our total contracts based revenues for the three and six month
        periods ended December 30, 2005 and December 24, 2004:
 
 Three
                  Months Ended
              
              Six
                  months Ended2005
              
              2004
              
              2005
              
              2004Cost
                  reimbursable
              
              
              75
              %
              
              64
              %
              
              75
              %
              
              63
              %Time
                  and materials
              
              
              17
              %
              
              27
              %
              
              16
              %
              
              26
              %Fixed
                  price
              
              
              8
              %
              
              9
              %
              
              9
              %
              
              11
              %Total
              
              
              100
              %
              
              100
              %
              
              100
              %
              
              100
              %
 
 
 ·
              **Iraq
                  and Other Crises.**The US Government is currently prosecuting a major war time effort
                  in
                  Iraq, a major world wide global war on terrorism including troops
                  in
                  Afghanistan and other countries, as well as domestic crises caused
                  by
                  floods, hurricanes and other disasters. The products and services
                  that SYS
                  offers in information connectivity, sensor networking, and command
                  and
                  control provides solutions to the real-time information and communications
                  challenges faced in the efforts to address these crises.
 
 However,
        defense firms and industry experts are concerned that money spent on Iraq
        is
        taking away from funding for these transformational technology solutions.
        At the
        same time, defense firms face concerns that existing programs could be cut
        or
        significantly slowed down or that their funding could be reallocated to other
        programs or directly to funding Iraq.
 
 Further,
        the funding for research and development or purchase of product to assist
        in
        dealing with future disasters often suffers while the rescue and rebuilding
        are
        in process. Our ability to generate decision support tools which will help
        in
        the response to future crises may be recognized but, there may not be funding
        to
        purchase our products and services and to provide funds to rebuild in the
        disaster areas. We believe that some of our efforts will be accelerated and
        some
        will slow down during the rebuilding process.
 
 ·
              **Revenue
                  Mix.**Our
                  business areas that encompass program management, financial management,
                  base support, and logistics support (together “legacy” business or
                  infrastructure support) have been in a continuous slow decline
                  for the
                  past five years while during this same period our C4ISR business
                  has
                  steadily grown. We anticipate that this trend will continue as
                  the DoD
                  continues to implement their Information Transformation focusing
                  on
                  enhanced information technology and communications systems, data
                  acquisition and real time situational awareness on such programs
                  as
                  Composable FORCEnet and Battle Force Composite Network, and Integrated
                  Autonomous Network Management.
 
 We
        believe growth in the legacy area will come from the following areas: (i)
        increasing usage of technology to reduce ongoing support costs, (ii) adoption
        by
        the Government of the use of process improvement to achieve cost reduction,
        (iii) charge lower prices per hour, and (iv) capturing a greater market share.
        Some of these approaches may result in lower margins.
 
 The
        area
        of infrastructure support is continuously reduced in order to fund other
        needs
        such as the war on terrorism, the Iraq War, as well as hurricane and other
        disaster relief. The specific risk to SYS is whether the growing information
        connectivity business can exceed the rate at which this infrastructure business
        is diminishing and whether SYS can capture a larger market share in this
        area.
 
 ·
              **Net
                  Centric Warfare.**The concept of using Net Centric approaches (an information
                  superiority-enabled concept of operations that generates increased
                  combat
                  power by networking sensors, decision makers, and shooters to achieve
                  shared awareness, increased speed of command, higher tempo of operations,
                  greater lethality, increased survivability, and a degree of
                  self-synchronization) as a force multiplier is gaining momentum.
                  SYS has a
                  number of contracts in this arena which have applications in the
                  DoD,
                  local and state governments, and industrial firms. SYS’s core strengths in
                  the C4ISR and knowledge management arenas coupled with the acquisitions
                  of
                  Polexis, Xsilogy and Antin Engineering have provided SYS with key
                  elements
                  for these solutions including systems and software engineering
                  services,
                  software products and tools, wireless sensor networking products
                  and
                  command response systems. While management believes that we have
                  assembled
                  key technologies and solutions to effectively compete in the Net
                  Centric
                  business as DoD funding continues to increase in this arena, increased
                  attention will also be forthcoming from larger businesses such
                  as
                  Lockheed, General Dynamics, and Northrop Grumman. As discussed
                  before SYS
                  has a pricing advantage over these companies for many areas, but
                  these
                  larger businesses have the advantage of tackling larger programs
                  with a
                  broader scope of work.
 
 ·
              **SYS
                  Strategy**.
                  Our business growth strategy is focused on continuing to develop
                  our core
                  strengths in C4ISR, information technology, and systems integration
                  while
                  adding products and capabilities that will allow us to grow our
                  markets in
                  these areas as well as expand into other markets, including commercial
                  and
                  industrial markets. We intend to accomplish this growth strategy
                  through
                  acquisitions and through productizing capabilities and solutions
                  developed
                  through our engineering services. We believe that this strategy
                  will
                  enable us to diversify our revenue sources, compete for larger
                  DoD
                  programs and grow our operating margins, especially through the
                  inclusion
                  of products. Three key aspects of this strategy are as
                  follows:
 
 o
              **Timing**.
                  The process of transforming a company from a legacy service provider
                  to
                  one providing a mix of high technology services and products has
                  to be
                  done in a staged fashion. As the revenues from the legacy revenues
                  decrease, new revenues from new customers need to be generated
                  in a
                  coincident fashion.
 
 o
              **Products.**Moving to greater product revenues has great potential for SYS.
                  The
                  primary issue is time. The products have to be effective and timely.
                  It is
                  challenging for a small company to put the total effort required
                  into a
                  new product and to do so in a timely fashion while generating quarterly
                  profits. We are also creating the infrastructure to effect product
                  development, marketing, sales, manufacturing and distribution.
                  We have
                  some risk in coming to the market too late or with generating new
                  sales to
                  cover the new expenses. We intend to develop the products in a
                  timely
                  manner and maintain our profitability, but near term quarterly
                  revenue and
                  profit could be impacted if there is a delay or decline in
                  sales.
 
 **Acquisitions** .
        One of
        the ways to deal with creating additional capabilities (e.g. products or
        niche
        service areas that broaden offerings) is to acquire smaller companies that
        have
        these capabilities. As we accelerate the process, we have to have the existing
        infrastructure in place to accommodate the new organizations and have them
        adapt
        to our systems and methodologies. We also need to have the resources and
        talent
        to recognize and evaluate these opportunities and to price them in a fashion
        that makes the process ultimately viable.
 
 We
        are at
        risk that not all of the acquisitions will be viable and a write down of
        any of
        these will be detrimental to quarterly earnings. As of
        December 30, 2005, the carrying value of Xsilogy related assets was $1,448,000.
        Since the date of acquisition in December 2004 there has been minimal direct
        product sales and cash flow generated from the deployment of these assets.
        However, the technology acquired from Xsilogy has been and continues to be
        integrated into several products being developed under contract with SYS
        customers and is being deployed as originally intended. The recoverability
        of
        the carrying value of these assets are assessed on a regular basis. If there
        is
        not a significant improvement in the cash flow generated from these assets
        in a
        reasonable period of time or other evidence of recoverability, consideration
        of
        an impairment charge may be appropriate in a future period.
 
 Our
        second quarter and six months ended December 30, 2005 were principally affected
        by the following additional factors;
 
 **Continuing
        Resolution.** All
        agencies of the Federal government must have appropriated funds by the start
        of
        the government’s fiscal year to operate. Since Congress seldom completes its
        appropriations work before October 1, the way to keep the government from
        shutting down without an appropriations act is by passing a "continuing
        resolution," (CR) or stop-gap appropriations measure.  If the House, the
        Senate, and the President are in agreement that a CR is in order, it can
        be
        quickly passed and the government continues to operate. Programs and activities
        may be funded up to the lower of the House-passed level, the Senate-passed
        level, or the previous year’s rate.
 
 This
        year
        the CR was signed on September 28, 2005. The CR was initially intended to
        fund
        programs and activities through November 18 or until enactment of the applicable
        appropriations Act, whichever occurs first. The CR included standard language
        prohibiting agencies from initiating or resuming programs or procurements
        not
        funded in FY 05, and this particular CR was especially egregious because it
        drastically reduced funding for many federal programs. The Senate voted on
        November 18 to continue the CR through December 17, and the President finally
        signed the DoD Authorization Bill on December 30, 2005. Government agencies
        were
        notified in January 2006 that the Authorization Bill was in effect. SPAWAR,
        the
        agency through which a significant portion of our contract funding flows,
        notified SYS in early January 2006 that they could start the process of sending
        SYS the monies previously designated for our contracts.
 
 This
        CR
        process took longer than usual and the consequences to us were severe in
        that
        our sponsors typically only fund on an incremental level. As a result, a
        significant amount of anticipated funding for the second quarter was delayed
        beyond our initial expectations.
 
 **Navy
        Marine Corps Intranet Program (NMCI).** This is
        a program where we have been performing in two separate efforts for the Navy.
        The first and the one that has grown in the past and will continue to grow
        in
        the future is based on work being performed to evaluate the effectiveness
        of the
        program for the Navy. The second effort is more traditional information
        technology support activities as a subcontractor to EDS for a number of bases
        in
        Southern California. As anticipated, this program has been declining for
        the
        past several quarters and all subcontractors have been continuously forced
        to
        lower billing rates during this time. As a result both, revenues and margins
        have deteriorated. During the second quarter just ended, we made the strategic
        decision to no longer pursue the tasking on this EDS subcontracting effort
        and
        have entered into an agreement with a small defense services company for
        those
        tasks to be transferred to that company in exchange for a royalty payment
        back
        to SYS for the next year. Accordingly, our revenues from that program will
        cease
        commencing in the third quarter of this fiscal year. Revenues under this
        effort
        amounted to approximately $250,000 in the most recent quarter down from
        approximately $750,000 in the second quarter of the prior year.
 
 **Change
        in Contract Types** .
        Two
        contracts totaling approximately $6.0M in annual revenues that were previously
        structured as fixed price contracts providing a higher level of profitability
        were converted to cost reimbursable contracts by the customers in the current
        fiscal year. Some portion of those contracts carried forward into our first
        quarter so the full impact of the reduced margins didn’t affect our
        profitability until the second quarter.
 
 **Product
        Development Expenses.** During
        the current fiscal year and in particular during the second quarter, we have
        significantly increased our research and development and sales and marketing
        activities associated with our newly developing product lines. We are currently
        investing in the following new product activities:
 
 ·
              **BattGuard.**This
                  is the SensorWorX based wireless sensor module for utilities to
                  monitor
                  the health of batteries for which we are presently under contract
                  by a
                  major NYSE public utility to deploy this solution in our fiscal
                  Q3 and Q4.
                  Efforts are underway to productize this for the utility vertical
                  and to
                  forge strategic alliances with industry channel
                  partners.
 
 ·
              **TTX.**This is the SensorWorX based wireless sensor module for biotech
                  and
                  pharmaceutical companies to monitor ultra low temperature freezers
                  containing high value bio materials for which we already have a
                  system
                  deployed for Novartis. Efforts are underway to productize this
                  for the
                  biotech vertical and to forge strategic alliances with industry
                  channel
                  partners.
 
 ·
              **Track
                  Tags.**We
                  are presently under contract to develop a wireless remote asset
                  tracking
                  product to be used for vehicle tracking. This product utilizes
                  the
                  SensorWorX wireless modules as well as the Xsilogy SkyRamp and
                  datacenter
                  capabilities. We are concurrently working to productize this at
                  a price
                  point to pursue multiple other market opportunities and are developing
                  channel partner sales and marketing
                  efforts.
 
 ·
              **Other
                  Contract.**We
                  are currently under contract to develop and build a wearable communication
                  gateway for first responders that connects a portable environmental
                  monitoring device with a geospatial information system integrated
                  into an
                  incident management system. We anticipate that this will develop
                  into a
                  larger market opportunity to retrofit existing systems used in
                  the field
                  with this upgraded set of
                  capabilities.
 
 ·
              **Vigilys.**Vigilys is an interoperability solution designed to increase information
                  visibility, sharing and understanding among Emergency Management
                  Personnel. VSensor is now part of the Vigilys platform and provides
                  customers a way to manage sensors through web-based services architecture.
                  We are currently in discussions with a major water utility that
                  would use
                  the sensor technology to monitor water conditions which would then
                  be
                  transmitted to its command center. If this water utility purchases
                  our
                  sensor technology products, they are also likely to deploy the
                  video
                  surveillance products from cVideo.
 
 In
        October 2005, SYS delivered Vigilys as part of the Emergency Response Management
        Network (ERMN), a distributed decision-making and situational awareness platform
        for the State of California, the Governors Office of Emergency Services (CA-OES)
        and California Department of Transportation (CALTRANS).
 
 The
        ERMN
        is a multi-phased initiative funded jointly by the Department of Homeland
        Security through its Office of Domestic preparedness and the State of California
        being led by the CA-OES and CALTRANS. The first phase of the project is an
        initial proof of concept in advance of future roll-out phases. We had
        anticipated a more rapid roll-out of this solution for California in the
        second
        quarter which we now believe will be in the second half of our next fiscal
        year.
        This has been delayed due to lack of funding at the California state level,
        but
        we expect that we will be able to market this solution to smaller city and
        state
        governments as well as fire departments and other early responder
        organizations.
 
 **Corporate
        Development Expenses.** During
        the second quarter we initiated new levels of public relations activities
        and
        marketing expenses to help position SYS in the market place and to provide
        assistance in staying abreast of long term project opportunities in the
        government markets.
 
 **Acquisitions.** We
        have
        acquired three companies to date in fiscal year 2006. Recurring internal
        expenses associated with the labor to research, analyze and evaluate these
        firms
        is extensive and not a reimbursable cost on our Government contracts so these
        costs have a direct impact on our profitability. In addition, there is often
        some overlap in overhead related costs in the period subsequent to the
        acquisitions until common systems and practices are fully aligned. Finally,
        in
        the case of Web Tech, acquired in August, we have not yet achieved the level
        of
        contract profitability we expect to be generating on this business.
 
 **Management
        Summary** .
        Revenues and profits for the second quarter were significantly impacted by
        two
        major themes. The first is the funding delays and uncertainties caused by
        the
        continuing resolution process and the second is the impact of the internal
        investments we’ve made in product development, corporate development and
        acquisitions. As a result, we have incurred significant expenses in the
        advancement of these technologies into products and at the same time, we
        are
        incurring expenses in developing the sales and marketing channels for selling
        these products. This results in increasing our SG&A as well as our R&D
        costs. We anticipate that some of these projects will develop into fully
        marketable products in the near term and will begin generating revenues.
        At the
        same time, we may decide to make further investments into other product
        development based opportunities. One such area of focus will likely be efforts
        to fully integrate the capabilities of the Logic Innovations and cVideo
        technologies together with our SensorWorX network architecture and to our
        Vigilys product offering.
  
  
  **Results
        of Operations**
 
 The
        following table sets forth certain items, including consolidated revenues
        for
        the three and six month periods ended December 30, 2005 and December 24,
        2004
        (in thousands):
  Three
                    Months Ended
                
                Six
                    Months Ended2005
                
                
                %
                
                2004
                
                
                %
                
                2005
                
                
                %
                
                2004
                
                
                %Revenues
                
                $
                12,448
                
                
                
                
                100.0
                %
                $
                10,462
                
                
                
                
                100.0
                %
                $
                25,542
                
                
                
                
                100.0
                %
                $
                21,569
                
                
                
                100.0
                %Operating
                    costs and expenses:Costs
                    of revenues
                
                
                9,330
                
                
                
                
                75.0
                %
                
                8,577
                
                
                
                
                82.0
                %
                
                19,492
                
                
                
                
                76.3
                %
                
                18,080
                
                
                
                83.8
                %Selling,
                    general & administrative
                
                
                2,072
                
                
                
                
                16.6
                %
                
                1,268
                
                
                
                
                12.1
                %
                
                3,793
                
                
                
                
                14.9
                %
                
                2,249
                
                
                
                10.4
                %Research
                    and development
                
                
                621
                
                
                
                
                5.0
                %
                
                51
                
                
                
                
                0.5
                %
                
                951
                
                
                
                
                3.7
                %
                
                60
                
                
                
                0.3
                %Total
                    operating costs and expenses
                
                
                12,023
                
                
                
                
                96.6
                %
                
                9,896
                
                
                
                
                94.6
                %
                
                24,236
                
                
                
                
                94.9
                %
                
                20,389
                
                
                
                94.5
                %Income
                    from operations
                
                
                425
                
                
                
                
                3.4
                %
                
                566
                
                
                
                
                5.4
                %
                
                1,306
                
                
                
                
                5.1
                %
                
                1,180
                
                
                
                5.5
                %Other
                    income
                
                
                22
                
                
                
                
                0.2
                %
                
                --
                
                
                
                
                --
                
                
                58
                
                
                
                
                0.2
                %
                
                --
                
                
                
                --Interest
                    expense
                
                
                (91
                )
                
                
                
                -0.7
                %
                
                (122
                )
                
                
                
                -1.2
                %
                
                (190
                )
                
                
                
                -0.7
                %
                
                (236
                )
                
                
                -1.1
                %Income
                    before income taxes
                
                
                356
                
                
                
                
                2.9
                %
                
                444
                
                
                
                
                4.2
                %
                
                1,174
                
                
                
                
                4.6
                %
                
                944
                
                
                
                4.4
                %Income
                    tax provision
                
                
                162
                
                
                
                
                1.3
                %
                
                188
                
                
                
                
                1.8
                %
                
                505
                
                
                
                
                2.0
                %
                
                384
                
                
                
                1.8
                %Net
                    income
                
                $
                194
                
                
                
                
                1.6
                %
                $
                256
                
                
                
                
                2.4
                %
                $
                669
                
                
                
                
                2.6
                %
                $
                560
                
                
                
                2.6
                %
 
 *Revenues.* For
        the
        second quarter of 2006, our revenues increased by approximately $1.9 million
        or
        19% to $12.4 million from $10.5 million for the same period in 2005. The
        increase in revenues was primarily attributable to the acquisitions of Antin,
        WebTech, Logic and cVideo which collectively accounted for $3.2 million of
        revenues during the quarter. Additional increases were derived from support
        of
        C4ISR initiatives such as the Composable FORCEnet and Battle Force Composite
        Network, Integrated Autonomous Network Management and sensor network programs
        which grew by approximately $500,000 over the prior year. These total increases
        of approximately $3.7 million were offset by a net $1.8 million reduction
        in
        revenues on the legacy business programs, all of which were due to planned
        decreases in activities by those customers and is consistent with management’s
        expectations of the general trends in our business. For the year to date,
        our
        revenues increased by approximately $4.0 million or 18% for the exact same
        reasons discussed in the quarterly results. Acquisition related revenues
        added
        approximately $5.6 million and C4ISR initiatives and sensor network programs
        added approximately $1.3 million for a total of $6.9 million in increases
        offset
        by $2.9 million decreases in legacy business.
 
 Revenues
        by operating segment for the three and six month periods ended December 30,
        2005
        and December 24, 2004 (in thousands):
 
 Three
                  Months Ended
              
              Six
                  Months Ended2005
              
              2004
              
              Change
              
              2005
              
              2004
              
              ChangeDSG
              
              $
              10,970
              
              $
              9,862
              
              $
              1,108
              
              $
              23,072
              
              $
              20,822
              
              $
              2,250PSSIG
              
              
              1,478
              
              
              600
              
              
              878
              
              
              2,470
              
              
              747
              
              
              1,723Total
                  revenues
              
              $
              12,448
              
              $
              10,462
              
              $
              1,986
              
              $
              25,542
              
              $
              21,569
              
              $
              3,973
 
 As
        previously discussed, revenues related to programs previously captured in
        the
        DSG, where the activities were focused on public safety and security, have
        been
        included in the PSSIG to reflect the nature of the business being performed.
        The
        growth in the PSSIG operating segment is primarily attributable to growth
        from
        the recent acquisitions of Logic and cVideo which together added revenues
        of
        $679,000 in the three and six month periods and growth in the following
        programs: (i) Office of Disaster Preparedness (ODP) Interoperable Communications
        Technology Assistance (ITP) focused on interoperable communications for public
        safety; (ii) the Joint Warning and Reporting Network (JWARN), a program that
        provides the military services near real-time operational capabilities to
        collect, analyze and report nuclear, biological and chemical agent detections,
        identification, location and warning information; and (iii) Composeable FORCEnet
        used in various homeland security related scenarios including hurricane Katrina
        relief efforts and other first responder situations and (iv) various contract
        related revenues developing wireless products incorporating the SensorWorX
        related products and architecture . All of these programs had significant
        growth
        in revenues over the prior year.
 
 *Costs
        of Revenue.* Costs of revenue include all direct costs such as labor, materials and
        subcontractor costs.  Costs of revenue also include indirect overhead costs
        such as facilities, indirect labor, fringe benefits and other discretionary
        costs which are pooled and allocated to contracts on a pro rata basis.
        Generally, changes in direct costs are correlated to changes in revenue as
        resources are consumed in the production of that revenue.
  As
        a
        percentage of revenue, costs of revenue were 75.0% for the second quarter
        of
        2006 as compared to 82.0% for the same period in 2005 resulting in gross
        margins
        of 25.0% and 18.0% respectively. For the year to date, costs of revenue
        were 76.3% as compared to 83.8% for the same period in the prior year resulting
        in gross margins of 23.7% and 16.2% respectively. The increase in margins
        in the
        current quarter and year to date is due to (i) a higher mix of direct labor
        costs which carries a higher margin than other costs of revenue, (ii)
        completion of certain fixed price contracts where profit margins improved
        over
        the duration of the contract and (iii) the inclusion of recently added products
        based revenues with higher gross margins than the services based business
        and
        (iv) the impacts of certain personnel who ordinarily would charge
        their labor to a contract were without tasking as a result of the continuing
        resolution and in some cases worked on internal tasks that were charged to
        SG&A.
 
 *Selling,
        general and administrative expenses.* Selling, general and administrative (SG&A) expenses include indirect labor,
        fringe benefits, sales and marketing, bid and proposal (B&P) and other
        indirect costs. For the three and six month periods, SG&A increased by
        approximately $800,000 and $1.5 million over the same periods in the prior
        year.
        As discussed in the events and trends section and costs of revenue sections
        above, these increases were attributable to investments made to expand our
        B&P, sales and marketing efforts and in our infrastructure to accommodate
        the increased scope of business operations from recent growth and acquisitions.
        We anticipate that we will likely maintain this level of SG&A expenditures
        during the remainder of fiscal 2006 as we develop new business lines, pursue
        acquisitions, sales and marketing activities.
 
 *Research
        and Development expenses.* Research
        and development (R&D) expenses for the three and six month periods in the
        current year were approximately $600,000 and $1.0 million, respectively and
        consisted primarily of burdened labor and materials costs. The incurrence
        of
        R&D expenses was made as a strategic decision at the beginning of the
        current fiscal year. The current R&D activities in process were discussed
        previously in the events and trends section and we anticipate that we will
        maintain this level of R&D for the foreseeable future. We had no significant
        product development programs in the prior year.
 
 *Income
        from operations.* Income
        from operations as a percentage of revenues decreased from 5.4% to 3.4% for
        the
        three month period and decreased from 5.5% to 5.1% in the six month period
        over
        the prior year. This decrease is primarily due to investments made in SG&A
        and R&D.
  Income
          from operations for
          the
          current fiscal year include share-based compensation expense incurred during
          the
          three and six month periods of approximately $109,000 and $215,000 respectively
          which included non-cash expenses associated with stock options granted
          to
          employees and the employee stock purchase plan. The recognition of these
          share-based compensation expenses is in accordance with FASB No. 123R,
          which was
          adopted for the first time in the current fiscal year.
 *Interest
        expense.* Interest
        expense decreased slightly during both the three month and six month periods
        as
        compared to the prior year. This decrease is primarily attributable to the
        conversion of $898,000 of convertible notes payable into common stock during
        the
        past six months and less use of the line of credit facility.
  *Income
        tax provision.* The
        income tax provision as a percentage of income before taxes was 45.5% and
        43.0%
        in the three and six month periods in the current year as compared to 42.3%
        and
        40.7% for the same periods in the prior year. The increase is primarily
        attributable to certain amounts of share-based compensation expenses recorded
        in
        accordance with SFAS 123R which are not deductible for tax purposes and
        accordingly have a direct impact on the effective tax rate.
  **Liquidity
        and Capital Resources**
 
 At
        December 30, 2005, SYS had cash of approximately $400,000. This represents
        an
        overall decrease of approximately $3.1 million from the balance at June 30,
        2005. The decrease is primarily due to cash used in investing activities
        of
        approximately $4.9 million of which $4.6 million was used for acquisitions.
        The
        cash uses were partially offset by approximately $300,000 in cash provided
        from
        operations and by approximately $1,500,000 of financing activities which
        included draws on the line of credit facility and the exercise of stock options
        and warrants.
 
 Net
        working capital was $6.6 million at December 30, 2005 compared to $8.1 million
        at June 30, 2005. The primary reason for the $1.5 million decrease in
        net working capital was the use of cash for acquisitions which was partially
        offset by the conversion of the current portion of notes payable into the
        Company’s common stock, and cash generated by operations before changes in
        current assets and liabilities.
  SYS
        has
        notes payable totaling $2.2 million consisting of $1.5 million remaining
        from a
        $3.2 million private placement completed during 2004 (excluding $49,000 balance
        of note discount), $554,000 issued in connection with the acquisition of
        Polexis, $196,000 issued in connection with the Antin acquisition, and $100,000
        issued in connection with Webtech. The Webtech related note payable was paid
        in
        February 2006. The balance of the notes payable are all convertible into
        the
        Company’s common stock at prices less than the current market
        price.
  Additions
        to furniture and equipment were $392,000 year to date due to the acquisition
        of
        furniture, equipment and software. SYS establishes a capital expenditures
        plan
        each year in connection with its annual budgeting process. SYS estimates
        that
        its capital expenditures for its current operations during the 2006 fiscal
        year
        will range from $500,000 to $750,000.
  Our
        sources of liquidity are cash generated by operations and our revolving line
        of
        credit facility for $4.0 million that expires on December 28, 2006. Our
        revolving line of credit facility had a balance of $572,000 and had available
        borrowing capacity of approximately $3.4 million at December 30,
        2005.
 
 The
        $4.0
        million revolving line of credit facility allows SYS to use (i) the full
        $4.0
        million for working capital purposes or (ii) under a Sub Facility, up to
        $2.0
        million of the credit facility for permitted acquisition purposes and $750,000
        for minority investment purposes. SYS must maintain certain financial covenants,
        including tangible effective net worth, current assets to current liabilities,
        debt to worth and cash flow coverage. The line of credit is subject to certain
        restrictions on permitted acquisitions and minority investments, and in some
        cases must receive the lender’s consent prior to using the facility for such
        purposes. If used for permitted acquisitions or minority investments these
        advances must be repaid over 48 months. SYS has the option of being charged
        prime plus 0.25% or LIBOR plus 300 basis points on the credit facility and
        prime
        plus 0.50% or LIBOR plus 325 basis points on the sub facility subject to
        minimum
        advance amounts and duration under the LIBOR option.
 
 The
        loan
        is collateralized by all of our assets including accounts receivable. Borrowings
        are limited to 80% of our billed accounts receivable that are less than
        90 days old. The lending agreement requires SYS to maintain certain
        covenants, including those described above.
  Management
        believes that SYS will have sufficient cash flow from operations and funds
        available under the revolving credit agreement to finance its operating and
        capital requirements through December 28, 2006. However, long-term
        liquidity and continued acquisition related growth will depend on our ability
        to
        manage cash, raise cash and maintain profitability. The company may seek
        to
        raise additional capital from time to time as market conditions permit and
        subject to Board approval.
 
 **Off-Balance
        Sheet Arrangements**
 
 SYS
        does
        not have any off-balance sheet arrangements.
 
 **Critical
        Accounting Policies and Estimates**
 
 Our
        discussion and analysis of our financial condition and results of operations
        are
        based upon our consolidated financial statements, which have been prepared
        in
        accordance with accounting principles generally accepted in the United States.
        The preparation of these financial statements requires management to make
        estimates and judgments that affect the reported amounts of assets, liabilities,
        revenues and expenses, and related disclosure of contingent liabilities.
        On an
        ongoing basis, management evaluates its estimates, including those that relate
        to revenues and customer billings, recovery of indirect costs, long-lived
        assets, intangible assets, income tax contingencies, share-based compensation
        and litigation. Management bases its estimates on historical experience and
        on
        various other assumptions that are believed to be reasonable under the
        circumstances, the results of which form the basis for making judgments about
        the carrying values of assets and liabilities that are not readily apparent
        from
        other sources. Actual results may differ from these estimates under different
        assumptions and conditions. If actual results significantly differ from
        management’s estimates, our financial condition and results of operations could
        be materially impaired.
 
 SYS
        believes the following critical accounting policies affect its more significant
        judgments and estimates used in the preparation of its consolidated financial
        statements.
 
 The
        majority of the Company’s revenue is derived from contracts with agencies of the
        U.S. Government that are typically cost-plus-fee, time-and-material and
        fixed-price contracts. Revenue on these contracts results from work performed
        on
        these contracts by the Company’s employees and subcontractors and from
        pass-through of costs for material. Revenue on cost-plus-fee contracts is
        recorded as contract allowable costs are incurred and fees earned. Revenue
        for
        time-and-material contracts is recorded on the basis of contract allowable
        labor
        and subcontractor hours worked times the contract defined billing rates plus
        the
        cost of material used in the performance on the contract. Revenue from
        service-type fixed-price contracts is recognized ratably over the contract
        period or by other appropriate output methods to measure service provided,
        and
        contract costs are expensed as incurred. Under fixed-price contracts, other
        than
        service-type contracts, revenue is recognized under the percentage of completion
        method, on the basis of costs incurred in relation to estimated total costs
        to
        complete the contract. The risk to the company on a fixed-price contract
        is that
        if actual costs exceed the estimated costs to complete the contract, operating
        income is negatively impacted.
 
 In
        general, SYS does not recognize revenues in excess of the allowable funding
        limitations on any delivery order or contract until negotiations are finalized.
        On occasion, our customers request that we proceed on a tasking in advance
        of
        the formal contract modification. We evaluate these requests according to
        their
        characteristics and the circumstances in which they occur after taking all
        factors into consideration such as probability of cost recovery, our experience
        with the customer, and satisfactory evidence that supports the customer’s intent
        to issue the modification. In these circumstances, if revenue recognition
        criteria are met, we only record revenue equal to costs incurred until such
        time
        as contract modifications are finalized. If our assessment for the probability
        of cost recovery changes in a subsequent period due to a change in circumstances
        then the revenues associated with those costs incurred may be
        reversed.
 
 Contract
        costs, including indirect costs, on certain U.S. Government contracts are
        subject to audit by the Defense Contract Audit Agency (DCAA) before final
        payment is received. We record revenues and accounts receivable at amounts
        expected to be realized upon final settlement.
  The
          Company also recognizes revenue from the sale of hardware, hardware products
          which include software that is more than incidental, hardware and software
          maintenance agreements, and Application Service Provider (ASP) services.
          The
          Company recognizes revenue when persuasive evidence of an arrangement exists,
          delivery has occurred or services have been provided, the sale price is
          fixed or
          determinable, and collectibility is probable.
 
 Revenue
          from product sales is generally recognized upon shipment, or once all applicable
          criteria have been met. Allowances are provided for estimated returns,
          discounts
          and trade-ins. Such allowances are adjusted periodically to reflect actual
          and
          anticipated experience.
 
 Revenue
          from maintenance and ASP services are recognized ratably over the maintenance
          term, which is typically one or two years. The unrecognized revenue portion
          of
          maintenance agreements billed is recorded as deferred revenue.
 
 Certain
          agreements include multiple deliverables or elements for products, software
          and/or services. Accordingly, the Company separates its deliverables into
          units
          of accounting in accordance with the provisions of Emerging Task Force
          (“EITF”)
          Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple
          Deliverables” using the residual method. In the absence of fair value for an
          undelivered element, the arrangement is accounted for as a single unit
          of
          accounting, resulting in a deferral of revenue recognition for the delivered
          elements until the undelivered elements are fulfilled.
 
 Revenue
          on software products and software-related elements are recognized, in accordance
          with SOP No. 97-2, “Software Revenue Recognition.” For arrangements that
          include both hardware products and software products, the Company evaluates
          the
          arrangement based on EITF 03-5, *“Applicability
          of AICPA Statement of Position 97-2 to Non-Software Deliverables in an
          Arrangement Containing More-Than-Incidental Software.”* In
          accordance with the provisions of EITF 03-5, the arrangement is divided
          between software-related elements and non-software deliverables.
          Software-related elements are accounted for in accordance with SOP 97-2.
          When
          software arrangements contain multiple elements and vendor specific objective
          evidence of fair value exists for all undelivered elements, the Company
          accounts
          for the delivered elements in accordance with the “Residual Method” prescribed
          by SOP No. 98-9. Otherwise, revenue is deferred and recognized in
          accordance with SOP 97-2.
 Our
        accounts receivable balances include unbilled receivables which are comprised
        of
        work-in-process which will be billed in accordance with contract terms and
        delivery schedules, as well as amounts billable upon final DCAA audit of
        our
        overhead rates, contract completion, milestones or completion of rate
        negotiations. Payments to us for performance on certain of our U.S. Government
        contracts are subject to audit by the DCAA, and are subject to government
        funding. We provide an allowance against our receivables for estimated losses
        that may result from rate negotiations and audit adjustments. To the extent
        that
        actual adjustments due to rate negotiations or audit adjustments differ from
        our
        estimates, our revenue may be impacted. Historically, SYS has not required
        significant allowances for these risks.
 
 Since
        our
        primary customer is the U.S. Government, SYS historically has not recorded
        significant charges for bad debt expense. Bad debt charges, if needed, are
        recognized in the period in which they are identified.
 
 The
        carrying value of our deferred tax assets, which are netted against deferred
        tax
        liabilities, assumes that SYS will be able to generate sufficient future
        taxable
        income, based on estimates and assumptions. If these estimates and assumptions
        change in the future, SYS may be required to record valuation allowances
        against
        its deferred tax assets resulting in additional income tax expenses. The
        likelihood of a material change in our expected realization of these assets
        is
        dependent on future taxable income, our ability to deduct tax loss carryforwards
        against future taxable income and the effectiveness of our tax planning
        strategies.
 
 Goodwill
        represents the excess of costs over fair value of assets of businesses acquired.
        Effective January 1, 2002, SYS adopted SFAS No. 142, “Goodwill and
        Other Intangible Assets,” which establishes financial accounting and reporting
        for acquired goodwill and other intangible assets and supersedes APB Opinion
        No. 17, “Intangible Assets”. Goodwill and intangible assets acquired in a
        purchase business combination and determined to have an indefinite useful
        life
        are not amortized, but instead tested for impairment at least annually in
        accordance with the provisions of SFAS No. 142. SFAS No. 142 also
        requires that intangible assets with estimable useful lives be amortized
        over
        their respective estimated useful lives to their estimated residual values,
        and
        reviewed for impairment in accordance with SFAS No. 144, “Accounting for
        Impairment or Disposal of Long-Lived Assets.”
 
 SFAS
        No. 142 requires that goodwill be tested for impairment at the reporting
        unit level at adoption and at least annually thereafter, utilizing a two
        step
        methodology. The initial step requires SYS to assess whether indications
        of
        impairment exist. If indications of impairment are determined to exist, the
        second step of measuring impairment is performed, wherein the fair value
        of the
        relevant reporting unit is compared to the carrying value, including goodwill,
        of such unit. If the fair value exceeds the carrying value, no impairment
        loss
        is recognized. However, if the carrying value of the reporting unit exceeds
        its
        fair value, the goodwill of the reporting unit is impaired.
 
 SYS
        performs its annual testing for impairment of goodwill and other intangible
        assets in the fourth quarter of each year. Based on management’s annual testing
        as of the fourth quarter of 2005, there were no indications of
        impairment.
 
 Costs
        related to research and development are charged to expense as incurred.
        Capitalization of development costs for software to be sold begins when a
        product’s technological feasibility has been established in accordance with the
        provisions of Statement of Financial Accounting Standards (SFAS) No. 86,
“Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
        Marketed.” To date, the time period between achieving technological feasibility,
        which the Company has defined as the establishment of a working model, which
        typically occurs when beta testing commences, and the general availability
        of
        such software, has been short, and as such, software development costs
        qualifying for capitalization have been insignificant.
 
 Share-Based
        Compensation: Beginning on July 1, 2005 we account for our employee stock
        purchase plan (ESPP), stock plans and other forms of share-based compensation
        under the provisions of SFAS No. 123R. SFAS No. 123R requires the recognition
        of
        the fair value of share-based compensation in net income. The fair value
        of our
        share-based compensation was estimated using a Black-Scholes option valuation
        model. This model requires the input of highly subjective assumptions and
        elections in adopting and implementing SFAS No. 123R, including expected
        stock
        price volatility and the estimated life of each award. The fair value of
        share-based awards is amortized over the vesting period of the award and
        we have
        elected to use the straight-line method for awards granted after the adoption
        of
        SFAS No. 123R and continue to use a graded vesting method for awards granted
        prior to the adoption of SFAS No. 123R. Prior to the adoption of SFAS No.
        123R,
        we accounted for our share-based compensation under the provisions of Accounting
        Principles Board (APB) Opinion No. 25 “Accounting For Stock Issued to Employees”
(APB No. 25) and Financial Accounting Standards Board (FASB) Interpretation
        No.
        44, “Accounting for Certain Transactions Involving Stock Compensation — an
        Interpretation of APB Opinion No. 25” and made pro forma footnote disclosures as
        required by Statement of Financial Accounting Standards (SFAS) No. 148,
“Accounting For Stock-Based Compensation - Transition and Disclosure”, which
        amends SFAS No. 123, “Accounting For Stock-Based Compensation”. Pro forma net
        income (loss) and pro forma net income (loss) per share disclosed in the
        footnotes to our condensed consolidated financial statements were estimated
        using a Black-Scholes option valuation model.
 
 **Risks
        Related to Our Business**
  *You
        should carefully consider the following risk factors and all other information
        contained herein as well as the information included in our Annual Report
        on
        Form 10-KSB for the year ended June 30, 2005, and other reports and filings
        made
        with the Securities and Exchange Commission in evaluating our business and
        prospects. Risks and uncertainties, in addition to those we describe below,
        that
        are not presently known to us or that we currently believe are immaterial
        may
        also impair our business operations. If any of the following risks occur,
        our
        business and financial results could be harmed, and the price of our common
        stock could decline.  You should also refer to the other information
        contained in this report, including our consolidated financial statements
        and
        related notes.*
 
 **We
        have depended upon a single customer, the U.S. Government, for the majority
        of
        our revenues to date, and a decrease in its demand for our services might
        harm
        our operating results.**
  A
        substantial part of our business at the present time is with the DoD. Even
        though the level of business with this customer is growing and we have
        negotiated multiple-year contracts that include option and award years, there
        is
        no certainty that budget changes in Congress or the DoD will not seriously
        affect us.  In addition, there is no certainty that the U.S. Government
        will exercise each option or award year available on a contract.
 
 SYS
        may,
        depending on the contract, perform as a prime contractor or as a subcontractor
        to another prime contractor. In cases where we perform as a subcontractor,
        we
        may be subject to price modifications required by the prime contractor. Such
        price modifications, if not mitigated by a corresponding reduction of costs,
        could have a negative impact on our profitability.
 
 **A
        significant number of our customers are government agencies subject to unique
        political and budgetary constraints and have special contracting requirements
        that may affect our ability to obtain new government
        customers.**
  A
        significant number of our customers are government agencies, principally
        DoD
        agencies. These agencies often do not set their own budgets and therefore
        have
        little control over the amount of money they can spend. In addition, these
        agencies experience political pressure that may dictate the manner in which
        they
        spend money. Due to political and budgetary processes and other scheduling
        delays that frequently occur in the contract or bidding process, some government
        agency orders may be canceled or substantially delayed, and the receipt of
        revenues or payments may be substantially delayed.
  In
        addition, future sales to government agencies will depend on our ability
        to meet
        government contracting requirements, certain of which may be onerous or
        impossible to meet, resulting in our inability to obtain particular contracts.
        Common requirements in government contracts include bonding, provisions
        permitting the purchasing agency to modify or terminate at will the contract
        without penalty and provisions permitting the agency to perform investigations
        or audits of our business practices.
  The
        U.S.
        Government has a program that encourages and sometimes requires large prime
        contractors to use small businesses.  The U.S. Government restricts the
        competition on some contracts to only qualifying small businesses.  Some of
        our contracts and subcontracts have been awarded based on our eligibility
        as a
        small business.  The definition of a small business changes depending on
        the type of product or service provided.  The U.S. Government uses the
        North American Industry Classification System (NAICS) codes to classify the
        small business size standards for all industries.  One of our primary NAICS
        codes is for engineering services, and beginning in fiscal year 2005, we
        will no
        longer qualify as a small business using this code.  We still qualify as a
        small business using several other NAICS codes.  In addition, the small
        business contracts currently held by SYS do not expire as a result of our
        no
        longer qualifying as a small business under any specific NAICS Code.  
Some of these contracts have option years, which are not affected by this
        change
        in small business status. While our revenues to date include revenues based
        on
        our qualifying as a small business pursuant to U.S. Government regulations
        under
        which it is no longer eligible as a small business; we believe the majority
        of
        these revenues will be able to be moved to other contracts and, therefore,
        will
        not be material to our financial condition or results of operations.  Our
        future revenues may be impacted by not qualifying as a small business under
        certain NAICS codes.
 
 **Any
        inability to adequately retain or protect our employees, customer relationships
        and proprietary technology could harm our ability to
        compete.**
 
 Our
        future success and ability to compete depends in part upon our employees
        and
        customer relationships and proprietary technology and trademarks, which we
        attempt to protect with a combination of patent, copyright, trademark and
        trade
        secret claims, as well as with our confidentiality procedures and contractual
        provisions. These legal protections afford only limited protection and are
        time-consuming and expensive to obtain and/or maintain. Further, despite
        our
        efforts, we may be unable to prevent third parties from soliciting our employees
        or customers or infringing upon or misappropriating our intellectual
        property.  Our employees, customer relationships and intellectual property
        may not be adequate to provide us with a competitive advantage or to prevent
        competitors from entering the markets for our products and services.
        Additionally, our competitors could independently develop non-infringing
        technologies that are competitive with, and equivalent or superior to, our
        technology. Monitoring infringement and/or misappropriation of intellectual
        property can be difficult, and there is no guarantee that we would detect
        any
        infringement or misappropriation of our proprietary rights. Even if we were
        to
        detect infringement or misappropriation of our proprietary rights, litigation
        to
        enforce these rights would be costly and would cause us to divert financial
        and
        other resources away from our business operations.
 
 **The
        departure of certain key personnel could harm the financial condition of
        SYS.**
 
 Certain
        key employees, such as Clifton L. Cooke, Jr., Edward M. Lake, and Kenneth
        D.
        Regan, are intimately involved in our business and have day-to-day relationships
        with critical customers. Competition for highly skilled business, product
        development, technical and other personnel is intense, and there can be no
        assurance that we will be successful in recruiting new personnel or in retaining
        our existing personnel. A failure on our part to retain the services of these
        key personnel could have a material adverse effect on our operating results
        and
        financial condition. We do not maintain key man life insurance on any of
        our
        employees.
 
 **We
        face numerous competitors.**
 
 We
        have
        many competitors with comparable characteristics and capabilities that compete
        for the same group of customers. Our competitors are competent and experienced
        and are continuously working to take projects away from us. Many of our
        competitors have greater financial, technical, marketing and other resources
        than we do. Our ability to compete effectively may be adversely affected
        by the
        ability of these competitors to devote greater resources to the sales and
        marketing of their products and services than are available to us.
 
 **We
        must comply with numerous U.S. Government regulations.**
  SYS
        could
        become liable for penalties under various procurement rules and
        regulations.  Changes in government regulations could harm our operating
        results.  Our business must comply with and is affected by various
        government regulations.  Among the most significant regulations
        are:
 
 ·
              the
                  Federal Acquisition Regulations, and agency regulations supplemental
                  to
                  the Federal Acquisition Regulations, which comprehensively regulate
                  the
                  formation, administration and performance of government
                  contracts;
 
 ·
              the
                  Truth in Negotiations Act, which requires certification and disclosure
                  of
                  all cost and pricing data in connection with contract negotiations;
 
 ·
              government
                  accounting regulations, which impose accounting requirements that
                  govern
                  our right to reimbursement under certain cost-based government
                  contracts;
                  and
 
 ·
              laws,
                  regulations and executive orders restricting the use and dissemination
                  of
                  information classified for national security purposes and the exportation
                  of certain products and technical data.
  **Accuracy
        of indirect billing rates is critical.**
  Our
        indirect billing rates are approved at least annually by the Defense Contract
        Management Agency (DCMA) after being reviewed by the Defense Contract Audit
        Agency (DCAA).  These rates can differ from our actual indirect
        rates.  We budget to have our actual indirect rates as close as possible to
        our government approved indirect rates at fiscal year end.  Throughout the
        year, management assesses how these rates compare to forecasted rates for
        the
        year.  If a
        variance is expected to exceed the amount to be billed, provisions for such
        variance are recognized at that time.
 
 **We
        rely on subcontractors.**
 
 We
        regularly employ subcontractors to assist us in satisfying our contractual
        obligations. If these subcontractors fail to perform their contractual
        obligations adequately, our prime contract performance and our ability to
        obtain
        future business could be materially and adversely impacted.
 
 Our
        performance of government contracts may involve the issuance of subcontracts
        to
        other companies upon which we rely to perform all or a portion of the work
        we
        are obligated to deliver to our customers.  There is a risk that we may
        have disputes with subcontractors concerning a number of issues, including
        the
        quality and timeliness of work performed by the subcontractor, customer concerns
        about the subcontractor, our decision not to extend task orders or issue
        new
        task orders under a subcontract, or our hiring of former personnel of a
        subcontractor.  A failure by one or more of our subcontractors to
        satisfactorily deliver agreed-upon services on a timely basis could materially
        and adversely impact our ability to perform our obligations as a prime
        contractor.  In extreme cases, such subcontractor performance deficiencies
        could result in the government terminating our contract for default.  A
        default termination could expose us to liability for excess costs of procurement
        by the government and have a material adverse effect on our ability to compete
        for future contracts and task orders.
 
 **Security
        clearances are necessary.**
  If
        SYS
        cannot obtain the necessary security clearances, we may not be able to perform
        classified work for the government and our revenues may suffer.  Certain
        government contracts require our facilities and some of our employees to
        maintain security clearances.  If we lose or are unable to obtain security
        clearances required for a particular contract, the client can terminate the
        contract or decide not to renew it upon its expiration.  As a result, to
        the extent we cannot obtain the required security clearances for our employees
        working on a contract, we may not derive the revenue anticipated from that
        contract. Any such reduction in revenue, if not replaced with revenue from
        other
        contracts, could seriously harm our operating results.
  Security
        breaches in sensitive government systems could result in the loss of clients
        and
        negative publicity.  Many of the systems we develop involve managing and
        protecting information involved in national security and other sensitive
        government functions.  A security breach in one of these systems could
        cause serious harm to our business, could result in negative publicity and
        could
        prevent us from having further access to such critically sensitive systems
        or
        other similarly sensitive areas for other government clients.
 
 **There
        are risks associated with our planned growth.**
  We
        plan
        to grow our revenues and profits by adding to our existing customer base
        through
        internal growth and by the acquisition of other government services and
        government or commercial technology related companies.  Over the past five
        years we have hired senior management personnel capable of establishing new
        business units within SYS.  Rapid expansion through internal growth has
        required additional capital resources.  We plan to continue this approach
        to building our government services business.  There can be no assurance
        that this approach will result in increased profitability in the
        future.
  Management
        believes that we can grow through the acquisition of other government services
        companies and government or commercial technology related companies that
        have
        product offerings which may be sold to both commercial and government
        customers.  The acquisition of other companies and growing those businesses
        is uncertain and contains a variety of business risks,
        including: integration, cultural differences, the retention of key
        personnel, competition, protection of intellectual property, profitability,
        industry changes and others.  Although we do not have an agreement to
        acquire any specific company at this time, we intend to attempt to expand
        our
        operations through the acquisition of other companies. Acquisitions and
        attempted acquisitions may place a strain on our limited personnel, financial
        and other resources. Our ability to manage this growth, should it occur,
        will
        require expansion of our capabilities and personnel.  We may not be able to
        find qualified personnel to fill additional positions or be able to successfully
        manage a larger organization. Further, we intend to finance these transactions
        through a combination of cash, equity and debt. Using our stock as a currency
        may have limitations as the trading volume in our stock has been limited,
        our
        stock price has been volatile, and our stock may not maintain a price sufficient
        to support transactions without being excessively dilutive.
  **We
        have very limited assets upon which to rely for adjusting to business variations
        and for growing new businesses.**
  While
        we
        are likely to look for new funding to assist in the acquisition of other
        profitable businesses, it is uncertain whether such funds will be available.
        Our
        substantial reliance on our revolving line of credit facility with Comerica
        Bank
        - California imposes certain limitations on us. If we are to grow and expand
        our
        operations, we will need to raise significant amounts of additional capital.
        There can be no assurance that we will be successful in raising a sufficient
        amount of additional capital, or if we are successful, that we will be able
        to
        raise capital on reasonable terms. If we do raise additional capital, our
        existing shareholders may incur substantial and immediate dilution.
  **There
        are a large number of shares that may be available for future sale, and the
        sale
        of these shares may depress the market price of our common
        stock.**
  As
        of
        December 30, 2005, we had issued 1 2,426,813
        shares of common stock. Up to 2,500,100 shares of common stock were issuable
        upon exercise of employee stock options at prices ranging from $1.00 to $4.10
        per share, 698,864 shares were issuable upon the conversion of convertible
        notes
        from a private placement in 2004 at $2.20 per share, 238,826 shares were
        issuable upon the conversion of convertible notes from the acquisition of
        Polexis at $2.32 per share, 78,400 shares were issuable upon the conversion
        of
        the convertible note payable from the Antin acquisition at $2.50 per share,
        313,401 shares were issuable upon the exercise of warrants issued in connection
        with a private placement of securities completed in 2005 exercisable at $2.50
        per share, and 50,000 shares were issuable upon the exercise of warrants
        issued
        in connection with the acquisition of the Lomasoft technology exercisable
        at
        $3.87 per share. The sale of shares issued upon any conversion of our
        outstanding convertible notes or the exercise of outstanding options, warrants
        or the stock purchase agreement could adversely affect the market price of
        our
        common stock.
 
 **There
        is a limited market for our common stock.**
  Our
        common stock is traded on the American Stock Exchange.  Trading in our
        common stock has been sporadic, and at present, there is a limited market
        for
        the stock. There can be no assurance that a stronger market will develop.
        Even
        if such a market does develop, it may not be sustained.  There are no
        analysts currently covering the Company.
  **Future
        sales of our common stock by existing shareholders under Rule 144 could decrease
        the trading price of our common stock.**
  As
        of
        December 30, 2005, a total of 5,534,766
        shares of our outstanding common stock were “restricted securities” and could be
        sold in the public markets only in compliance with Rule 144 adopted under
        the
        Securities Act of 1933 or other applicable exemptions from registration.
        Rule
        144 provides that a person holding restricted securities for a period of
        one
        year may thereafter sell, in brokerage transactions, an amount not exceeding
        in
        any three-month period the greater of either (i) 1% of the issuer’s outstanding
        common stock or (ii) the average weekly trading volume in the securities
        during
        a period of four calendar weeks immediately preceding the sale. Persons who
        are
        not affiliated with the issuer and who have held their restricted securities
        for
        at least two years are not subject to the volume limitation. Possible or
        actual
        sales of our common stock by present shareholders under Rule 144 could have
        a
        depressive effect on the price of our common stock.
  **Our
        directors, executive officers and affiliated persons beneficially own
        approximately 32% of our stock, including stock options and warrants exercisable
        within 60 days of December 30, 2005; their interests could conflict with
        yours;
        significant sales of stock held by them could have a negative effect on our
        stock price; shareholders may be unable to exercise
        control.**
 
 As
        of
        December 30, 2005, our directors, executive officers and affiliated persons
        were
        the beneficial owners of approximately 3 2.0%
        of
        our common stock, including stock options exercisable within 60 days of December
        30, 2005. As a result, our executive officers, directors and affiliated persons
        will have a significant ability to:
 
 •
elect
        or defeat the election of our directors;
 •
amend
        or prevent amendment of our articles of incorporation or bylaws;
 •
effect
        or prevent a merger, sale of assets or other corporate transaction;
        and
 •
control
        the outcome of any other matter submitted to the shareholders for
        vote.
 
 As
        a
        result of their ownership and positions, our directors and executive officers,
        collectively, are able to significantly influence all matters requiring
        shareholder approval, including the election of directors and approval of
        significant corporate transactions. In addition, sales of significant amounts
        of
        shares held by our directors and executive officers, or the prospect of these
        sales, could adversely affect the market price of our common stock. Management’s
        stock ownership may discourage a potential acquirer from making a tender
        offer or otherwise attempting to obtain control of us, which in turn could
        reduce our stock price or prevent our shareholders from realizing a premium
        over
        our stock price.
 
 **ITEM
        3. Quantitative and Qualitative Disclosures about Market
        Risk**
 
 Our
        exposure to market risk for changes in interest rates relates primarily to
        our
        investment income and interest expense. As of December 30, 2005 our cash
        was
        primarily invested in a money market interest bearing account. A hypothetical
        10% adverse change in the average interest rate on our money market cash
        investments would have had no material effect on net income for the quarter
        ended December 30, 2005. We currently do not utilize any derivative financial
        instruments to hedge interest rate risks.
 
 The
        following table presents scheduled principal payments and related weighted
        average interest rates of the Company’s long-term fixed rate debt for the fiscal
        years ended June 30:
 
 2006
              
              2007
              
              Total
              
              Fair
                  Value (1)Fixed
                  rate debt
              
              $
              --
              
              $
              2,288,000
              
              $
              2,288,000
              
              $
              2,288,000Weighted
                  average interest rate
              
              
              10.0%
              
              
              10.0%
              
              
              10.0%
              
              
              10.0%
 
 The
        Company’s $4,000,000 line of credit facility bears interest on outstanding
        balances at the bank’s prime rate plus .25%. The Company incurred $6,000 of
        interest on this credit facility in the three months and six month periods
        ended
        December 30, 2005 and the interest for the year ended June 30, 2005 was $29,000.
        Based on the Company’s recent history of borrowings under this credit facility,
        if there was a hypothetical 10% adverse change in the average interest rate,
        the
        additional interest expense would not have had a material effect on net income
        for the quarter ended December 30, 2005.
 
 (1)
        The
        fair value of fixed-rate debt was estimated based on the current rates offered
        for fixed-rate debt with similar risks and maturities.
 
 **ITEM
        4. Controls and Procedures**
 
 **Disclosure
        Controls and Procedures**
 
 As
        required by Exchange Act Rule 13a−15(b), as of December 30, 2005, we carried out
        an evaluation, under the supervision and with the participation of our
        management, including our Chief Executive Officer and our Chief Financial
        Officer, of the effectiveness of the design and operation of our disclosure
        controls and procedures as defined in Rule 13a−15(e). Based upon that
        evaluation, our Chief Executive Officer along with our Chief Financial Officer,
        concluded that our disclosure controls and procedures are
        effective.
 
 We
        intend
        to review and evaluate the design and effectiveness of our disclosure controls
        and procedures on an ongoing basis and to correct any material deficiencies
        that
        we may discover. Our goal is to ensure that our senior management has timely
        access to material information that could affect our business.
 
 **Changes
        in Internal Control over Financial Reporting**
 
 There
        has
        been no change in our internal control over financial reporting during our
        most
        recent fiscal quarter that has materially affected, or is reasonably likely
        to
        materially affect, our internal control over financial reporting.
 
  
  
 **PART
        II - OTHER INFORMATION**
 
 **Item
        1** **.** **Legal Proceedings**
 
 NONE
  **Item
        2.** **Unregistered
        Sales Of Equity Securities And Use Of Proceeds.**
 
 On
        September 12, 2005, SYS’s Board of Directors approved the issuance of an
        additional 25,130 shares of the Company’s common stock to be issued to the Antin
        Engineering, Inc. (Antin) stockholders as a result of a modification to a
        working capital purchase price adjustment provided for in the purchase
        agreement. One-half of the shares were issued directly to the Antin stockholders
        and the balance were placed in escrow which are contingently issuable to
        the
        stockholders based upon the future operating performance of Antin through
        June 30, 2006. The
        12,565 shares issued directly to the Antin shareholders were valued at $4.10
        per
        share or $51,517.
 
 On
        September 27, 2005 warrants to purchase 50,000 shares of the SYS common stock
        at
        a volume weighted average price of $3.87 were issued in conjunction with
        the
        acquisition of technology and intellectual property rights from Lomasoft
        Corporation. The warrants expire in five years and contain piggy-back
        registration rights. The Company is obligated to use its best efforts to
        register these shares within one year of the purchase date.
 
 As
        a
        result of a determination during the quarter ended September 30, 2005 that
        certain milestones had been met as of June 30, 2005, Xsilogy, Inc. was issued
        80,000 shares of SYS stock on December 16, 2005 at a value of
        $376,000.
 
 On
        November 7, 2005 445,768 shares of SYS common stock were issued in connection
        with the acquisition of all of the outstanding stock of Logic Innovations,
        Inc.
        These shares were valued based on an average closing price of $4.56 per
        share.
  **Item
        3****.****Defaults
        Upon Senior Securities**
 
 NONE
  **Item
        4** **.** **Submission of Matters to a Vote of Securities Holders**
  On
        December 16, 2005, the Company held its 2005 Annual Meeting of Shareholders.
        There were 11,264,448 shares eligible as of the record date and 9,349,364
        shares
        were represented either in person or by proxy at the meeting. The following
        matters were voted on at the meeting:
  (a.)
        Proposal to elect the Directors pursuant to management's nominations.  This
        proposal was approved with 9,335,234 shares voting in favor, 14,130 shares
        voting against.
  (b.)
        Proposal to approve the appointment of KPMG LLP as the independent registered
        public accounting firm for the corporation for its 2006 fiscal year. 
This proposal was approved with 9,189,539 shares voting in favor, 138,311
        shares
        voting against, and 21,514 shares abstaining.
  **Item
        5** **.** **Other Information**
 
 At
        the
        Annual Board of Directors meeting held on December 16, 2005, the following
        people were elected as Chairman and officers of the Company:
 
 David
                  A. Derby
              ChairmanAlfred
                  M. Gray
              Vice-ChairmanClifton
                  L. Cooke, Jr.
              President
                  and Chief Executive OfficerEdward
                  M. Lake
              Chief
                  Financial OfficerMichael
                  W. Fink
              SecretaryRobert
                  A. Babbush
              Assistant
                  SecretaryKenneth
                  D. Regan
              President,
                  Defense Solutions GroupBen
                  Goodwin
              President,
                  Public Safety and Security Division
 
 At
        the
        Annual Board of Directors meeting held on December 16, 2005, the following
        people were elected as members of the following Directors’
Committees:
 
 **Audit
                  Committee**
              
              **Executive
                  Committee**Thomas
                  A. Page, Chairman
              
              David
                  A. Derby, ChairmanDavid
                  A. Derby
              
              John
                  M. BurnsJohn
                  R. Hicks
              
              Clifton
                  L. Cooke, Jr.Charles
                  E. Vandeveer
              
              John
                  R. Hicks**Compensation
                  Committee**
              
              **Senior
                  Advisory Committee**Gail
                  K. Naughton, Chairman
              
              Alfred
                  M. Gray, ChairmanJohn
                  M. Burns
              
              Clifton
                  L. Cooke, Jr.John
                  R. HicksCharles
                  E. Vandeveer
  **Item
        6** **.** **Exhibits**
 
 2.1
              
              Certificate
                  of Ownership filed with the California Secretary of State on
                  November 28, 1979, filed as Exhibit 2.1 to the Company’s report on
                  Form 10-K for the fiscal year ended June 30, 1979, and incorporated
                  by this reference.2.2
              
              Certificate
                  of Ownership filed with the California Secretary of State on
                  March 18, 1985, incident to change of name of the Company, filed as
                  Exhibit 3.6 to this Company’s report on Form 10-K for the fiscal year
                  ended June 30, 1985, and incorporated by this
                  reference.2.3
              
              Testmasters,
                  Inc. Stock Purchase Agreement, filed as Exhibit 2.1 to this Company’s
                  Registration Statement on Form SB-2 dated May 24, 2002, and incorporated
                  by this reference.2.4
              
              Polexis
                  merger agreement, filed as Exhibit 2.2 to this Company’s Registration
                  Statement on Form SB-2 dated April 19, 2004, and incorporated by this
                  reference.2.5
              
              Asset
                  purchase and sale agreement effective as of December 15, 2004, by and
                  between SYS and Xsilogy, Inc filed as Exhibit 2.5 to this Company’s report
                  on Form 10-QSB dated February 7, 2005, and incorporated by this
                  reference.2.6
              
              Agreement
                  and plan of merger effective as of January 3, 2005 among SYS, Shadow
                  I, Inc., a wholly-owned subsidiary of SYS, Antin Engineering, Inc.,
                  and
                  the stockholders of Antin Engineering, Inc. filed as Exhibit 2.6
                  to this
                  Company’s report on Form 10-QSB dated February 7, 2005, and
                  incorporated by this reference.2.7
              
              Agreement
                  and Plan of Merger effective as of November 7, 2005 among SYS,
                  Shadow II,
                  Inc., a wholly owned subsidiary of SYS, Logic Innovations, Inc.
                  and the
                  stockholders of Logic Innovations, Inc.2.8
              
              Asset
                  purchase and sale agreement effective December 2, 2005 among SYS,
                  cVideo,
                  Inc. and certain of the stockholders of cVideo, Inc.3(i)
              
              Articles
                  of Incorporation for SYS, as amended, filed as Exhibit 3.1 to the
                  Company’s Registration Statement on Form SB-2, filed May 24, 2002, and
                  incorporated by this reference.3(ii)
              
              Bylaws
                  of SYS filed as Exhibit 3.2 to the Company’s Registration Statement on
                  Form SB-2, filed May 24, 2002, and incorporated by this
                  reference.4.1
              
              Certificate
                  of Determination of Preferences of Preferred Shares of Systems
                  Associates,
                  Inc., filed by the Company with the California Secretary of State
                  on
                  July 28, 1968, filed as Exhibit 3.2 to the Company’s report on Form
                  10-K for the fiscal year ended June 30, 1981, and incorporated by
                  this reference.4.2
              
              Certificate
                  of Determination of Preferences of Preference Shares of Systems
                  Associates, Inc., filed by the Company with the California Secretary
                  of
                  State on December 27, 1968, filed as Exhibit 3.3 to the Company’s
                  report on Form 10-K for the fiscal year ended June 30, 1981, and
                  incorporated by this reference.4.3
              
              Certificate
                  of Determination of Series B 9% Cumulative Convertible Callable
                  Non-Voting
                  Preference Stock was filed by the Company with the California Secretary
                  of
                  State on August 15, 1996, and included in Exhibit
                  3(i).4.4
              
              Form
                  of Subscription Agreement from the November 2001 Offering, filed as
                  Exhibit 4.1 to this Company’s Registration Statement on Form SB-2 dated
                  May 24, 2002.4.5
              
              Form
                  of Convertible Note from the November 2001 Offering, filed as Exhibit
                  4.2 to this Company’s Registration Statement on Form SB-2 dated May 24,
                  2002.4.6
              
              Form
                  of Subscription Agreement from the December 2003 Offering
                  (Convertible Note from December 2003 Offering included), filed as
                  Exhibit 4.3 to this Company’s Registration Statement on Form SB-2 dated
                  April 19, 2004.4.7
              
              Securities
                  Purchase Agreement, dated as of May 27, 2005, by and among SYS
                  and the
                  investor parties as identified on the signature pages thereto,
                  filed as
                  exhibit 10.1 to Form 8-K filed on June 3, 2005 and incorporated
                  by this
                  reference.4.8
              
              Registration
                  Rights Agreement, dated as of May 27, 2005, by and among SYS and
                  the
                  investor parties as identified on the signature pages thereto,
                  filed as
                  exhibit 10.1 to Form 8-K filed on June 3, 2005 and incorporated
                  by this
                  reference.4.9
              
              Form
                  of Warrant to be issued by SYS to the investors in connection with
                  the
                  Securities Purchase Agreement from May 2005 Offering, filed as
                  exhibit
                  10.1 to Form 8-K filed on June 3, 2005 and incorporated by this
                  reference.10.1
              
              SYS
                  1997 Incentive Stock Option and Restricted Stock Plan filed as
                  Attachment
                  1 to the Company’s Proxy Statement filed on February 21, 1997, and
                  incorporated by this reference.10.2
              
              SYS
                  2003 Stock Option Plan filed as Exhibit 10.2 to the Company’s report on
                  Form S-8 filed on April 8, 2003, and incorporated by this
                  reference.10.3
              
              SYS
                  2003 Employee Stock Purchase Plan filed as Exhibit 10.3 to the
                  Company’s
                  report on Form S-8 filed on April 8, 2003, and incorporated by this
                  reference.10.4
              
              Employment
                  contract for Clifton L. Cooke, Jr., the Company’s Chief Executive Officer
                  filed as Exhibit 10.4 to the Company’s report on Form 10-KSB for the
                  fiscal year ended June 30, 2004, and incorporated by this
                  reference.10.5
              
              Employment
                  contract for Edward M. Lake, the Company’s Chief Financial Officer and
                  Executive Vice President of Financial Operations filed as Exhibit
                  10.5 to
                  the Company’s report on Form 10-KSB for the fiscal year ended
                  June 30, 2004, and incorporated by this reference.10.6
              
              Employment
                  contract for Michael W. Fink, the Company’s Secretary and Sr. Vice
                  president of Finance and Contracts filed as Exhibit 10.6 to the
                  Company’s
                  report on Form 10-KSB for the fiscal year ended June 30, 2004, and
                  incorporated by this reference.10.7
              
              Employment
                  contract for Robert A. Babbush, the Company’s Assistant Secretary and Sr.
                  Vice President of Administration filed as Exhibit 10.7 to the Company’s
                  report on Form 10-KSB for the fiscal year ended June 30, 2004, and
                  incorporated by this reference.10.8
              
              Employment
                  contract for Colin Hirayama, the Company’s Sr. Vice President of
                  Technology Assessment filed as Exhibit 10.8 to the Company’s report on
                  Form 10-KSB for the fiscal year ended June 30, 2004, and incorporated
                  by this reference.10.9
              
              Employment
                  contract for Robert Holmes, the Company’s Defense Solutions Group’s Sr.
                  Vice President of Defense Operations filed as Exhibit 10.9 to the
                  Company’s report on Form 10-KSB for the fiscal year ended June 30,
                  2004, and incorporated by this reference.10.10
              
              Employment
                  contract for Kenneth D. Regan, the Company’s Defense Solutions Group’s
                  President and Chief Operating Officer filed as Exhibit 10.10 to
                  the
                  Company’s report on Form 10-KSB for the fiscal year ended June 30,
                  2004, and incorporated by this reference.10.11
              
              Employment
                  contract for Linda E. Gagnon, the Company’s Defense Solutions Group’s
                  Division Sr. Vice President, Engineering and Management Solutions
                  filed as
                  Exhibit 10.11 to the Company’s report on Form 10-KSB for the fiscal year
                  ended June 30, 2004, and incorporated by this
                  reference.10.12
              
              Restricted
                  stock purchase agreement between SYS and Ben Goodwin dated August
                  16,
                  2005, filed as exhibit 99.1 to Form 8-K filed August 18,
                  2005.31.1
              
              Certification
                  of Chief Executive Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.31.2
              
              Certification
                  of Chief Financial Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.32.1
              
              Certification
                  of Chief Executive Officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.32.2
              
              Certification
                  of Chief Financial Officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.
 
  
  
 
 **SIGNATURES**
  In
        accordance with the requirements of the Exchange Act, the registrant caused
        this
        report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
   SYS(Registrant)Date:
              February
                  13, 2006
              
              /s/
                  Clifton L. Cooke, Jr.Clifton
                  L. Cooke, Jr.Chief
                  Executive OfficerDate:
              February
                  13, 2006
              
              /s/
                  Edward M. LakeEdward
                  M. LakeChief
                  Financial Officer
 
 
  
  **Exhibit
        31.1**
  **CERTIFICATION
        OF CHIEF EXECUTIVE OFFICER**
  I,
        Clifton L. Cooke, Jr., certify that:
  1.
        I have
        reviewed this quarterly report on Form 10-Q of SYS;
  2.
        Based
        on my knowledge, this report does not contain any untrue statement of a material
        fact or omit to state a material fact necessary to make the statements made,
        in
        light of the circumstances under which such statements were made, not misleading
        with respect to the period covered by this report;
 
 3.
        Based
        on my knowledge, the financial statements, and other financial information
        included in this report, fairly present in all material respects the financial
        condition, results of operations and cash flows of the registrant as of,
        and
        for, the periods presented in this report.
  4.
        The
        registrant’s other certifying officer(s) and I are responsible for establishing
        and maintaining disclosure controls and procedures (as defined in Exchange
        Act
        Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
  a)
        Designed such disclosure controls and procedures, or caused such disclosure
        controls and procedures to be designed under our supervision, to ensure that
        material information relating to the registrant, including its consolidated
        subsidiaries, is made known to us by others within those entities, particularly
        during the period in which this report is being prepared; and
  b)
        Evaluated the effectiveness of the registrant’s disclosure controls and
        procedures and presented in this report our conclusions about the effectiveness
        of the disclosure controls and procedures, as of the end of the period covered
        by this report based on such evaluation; and
  c) 
        Disclosed in this report any change in the registrant’s internal control over
        financial reporting that occurred during the registrant’s most recent fiscal
        quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
        that has materially affected, or is reasonably likely to materially affect,
        the
        registrant’s internal control over financial reporting; and
  5.
        The
        registrant’s other certifying officer(s) and I have disclosed, based on our most
        recent evaluation of internal control over financial reporting, to the
        registrant’s auditors and the audit committee of registrant’s board of directors
        (or persons performing the equivalent functions):
  a) 
        All significant deficiencies and material weaknesses in the design or operation
        of internal control over financial reporting which are reasonably likely
        to
        adversely affect the registrant’s ability to record, process, summarize and
        report financial information; and
  b) 
        Any fraud, whether or not material, that involves management or other employees
        who have a significant role in the registrant’s internal control over financial
        reporting.
   Dated:
                  February 13, 2006
              
              By:
              /s/
                  Clifton L. Cooke, Jr.Clifton
                  L. Cooke, Jr.Chief
                  Executive Officer
 
 
  
  **Exhibit
        31.2**
  **CERTIFICATION
        OF CHIEF FINANCIAL OFFICER**
  I,
        Edward
        M. Lake, certify that:
  1.
        I have
        reviewed this quarterly report on Form 10-Q of SYS;
  2.
        Based
        on my knowledge, this report does not contain any untrue statement of a material
        fact or omit to state a material fact necessary to make the statements made,
        in
        light of the circumstances under which such statements were made, not misleading
        with respect to the period covered by this report;
  3.
        Based
        on my knowledge, the financial statements, and other financial information
        included in this report, fairly present in all material respects the financial
        condition, results of operations and cash flows of the registrant as of,
        and
        for, the periods presented in this report.
  4.
        The
        registrant’s other certifying officer(s) and I are responsible for establishing
        and maintaining disclosure controls and procedures (as defined in Exchange
        Act
        Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
  a)
        Designed such disclosure controls and procedures, or caused such disclosure
        controls and procedures to be designed under our supervision, to ensure that
        material information relating to the registrant, including its consolidated
        subsidiaries, is made known to us by others within those entities, particularly
        during the period in which this report is being prepared; and
  b)
        Evaluated the effectiveness of the registrant’s disclosure controls and
        procedures and presented in this report our conclusions about the effectiveness
        of the disclosure controls and procedures, as of the end of the period covered
        by this report based on such evaluation; and
  c)
        Disclosed in this report any change in the registrant’s internal control over
        financial reporting that occurred during the registrant’s most recent fiscal
        quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
        that has materially affected, or is reasonably likely to materially affect,
        the
        registrant’s internal control over financial reporting; and
  5.
        The
        registrant’s other certifying officer(s) and I have disclosed, based on our most
        recent evaluation of internal control over financial reporting, to the
        registrant’s auditors and the audit committee of registrant’s board of directors
        (or persons performing the equivalent functions):
  a)
        All
        significant deficiencies and material weaknesses in the design or operation
        of
        internal control over financial reporting which are reasonably likely to
        adversely affect the registrant’s ability to record, process, summarize and
        report financial information; and
  b)
        Any
        fraud, whether or not material, that involves management or other employees
        who
        have a significant role in the registrant’s internal control over financial
        reporting.
   Dated:
                  February 13, 2006
              
              By:
              /s/
                  Edward M. LakeEdward
                  M. LakeChief
                  Financial Officer
 
 
  
  **Exhibit
        32.1**
  **CERTIFICATION
        OF CHIEF EXECUTIVE OFFICER**
  I,
        Clifton L. Cooke, Jr., Chief Executive Officer of SYS (the “Registrant”), do
        hereby certify pursuant to Rule 15d-14(b) of the Securities and Exchange
        Act of
        1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United
        States Code that:
  (1)
        the
        Registrant’s Quarterly Report on Form 10-Q of the Registrant for the quarter
        ended December 30, 2005 (the “Report”), to which this statement is filed as an
        exhibit, fully complies with the requirements of Section 13(a) or 15(d) of
        the Securities Exchange Act of 1934, as amended; and
  (2)
        the
        information contained in the Report fairly presents, in all material respects,
        the financial condition and results of operations of the
        Registrant.
  Dated:
                  February 13, 2006
              
              By:
              /s/
                  Clifton L. Cooke, Jr.Clifton
                  L. Cooke, Jr.Chief
                  Executive Officer
 
 
  
  **Exhibit
        32.2**
  **CERTIFICATION
        OF CHIEF FINANCIAL OFFICER**
  I,
        Edward
        M. Lake, Chief Financial Officer of SYS (the “Registrant”), do hereby certify
        pursuant to Rule 15d-14(b) of the Securities and Exchange Act of 1934, as
        amended, and Section 1350 of Chapter 63 of Title 18 of the United States
        Code
        that:
  (1)
        the
        Registrant’s Quarterly Report on Form 10-Q of the Registrant for the quarter
        ended December 30, 2005 (the “Report”), to which this statement is filed as an
        exhibit, fully complies with the requirements of Section 13(a) or 15(d) of
        the
        Securities Exchange Act of 1934, as amended; and
  (2)
        the
        information contained in the Report fairly presents, in all material respects,
        the financial condition and results of operations of the
        Registrant.
  Dated:
                  February 13, 2006
              
              By:
              /s/
                  Edward M. LakeEdward
                  M. LakeChief
                  Financial Officer